We Wouldn't Be Too Quick To Buy M Winkworth PLC (LON:WINK) Before It Goes Ex-Dividend

It looks like M Winkworth PLC (LON:WINK) is about to go ex-dividend in the next three days. Investors can purchase shares before the 22nd of October in order to be eligible for this dividend, which will be paid on the 19th of November.

M Winkworth's next dividend payment will be UK£0.018 per share. Last year, in total, the company distributed UK£0.084 to shareholders. Last year's total dividend payments show that M Winkworth has a trailing yield of 6.6% on the current share price of £1.275. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for M Winkworth

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 76% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 52% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that M Winkworth's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit M Winkworth paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see M Winkworth's earnings per share have been shrinking at 4.7% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, M Winkworth has lifted its dividend by approximately 6.3% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

The Bottom Line

From a dividend perspective, should investors buy or avoid M Winkworth? While earnings per share are shrinking, it's encouraging to see that at least M Winkworth's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of M Winkworth.

With that in mind though, if the poor dividend characteristics of M Winkworth don't faze you, it's worth being mindful of the risks involved with this business. For example, M Winkworth has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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