It Might Not Be A Great Idea To Buy IPH Limited (ASX:IPH) For Its Next Dividend

Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that IPH Limited (ASX:IPH) is about to go ex-dividend in just couple of days. You can purchase shares before the 25th of August in order to receive the dividend, which the company will pay on the 18th of September.

IPH’s next dividend payment will be AU$0.15 per share, on the back of last year when the company paid a total of AU$0.30 to shareholders. Calculating the last year’s worth of payments shows that IPH has a trailing yield of 4.0% on the current share price of A$7.44. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether IPH can afford its dividend, and if the dividend could grow.

View our latest analysis for IPH

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. IPH distributed an unsustainably high 110% of its profit as dividends to shareholders last year. Without extenuating circumstances, we’d consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (57%) of its free cash flow in the past year, which is within an average range for most companies.

It’s good to see that while IPH’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we’re encouraged by the steady growth at IPH, with earnings per share up 5.8% on average over the last five years.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last five years, IPH has lifted its dividend by approximately 34% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Should investors buy IPH for the upcoming dividend? While earnings per share have been growing slowly, IPH is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. It’s not that we think IPH is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of IPH don’t faze you, it’s worth being mindful of the risks involved with this business. In terms of investment risks, we’ve identified 1 warning sign with IPH and understanding them should be part of your investment process.

We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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