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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see QAF Limited (SGX:Q01) is about to trade ex-dividend in the next 2 days. You will need to purchase shares before the 13th of May to receive the dividend, which will be paid on the 5th of June.
QAF's next dividend payment will be S$0.04 per share, and in the last 12 months, the company paid a total of S$0.05 per share. Last year's total dividend payments show that QAF has a trailing yield of 6.1% on the current share price of SGD0.82. 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 check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for QAF
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year QAF paid out 104% of its profits as dividends to shareholders, suggesting the dividend is not well covered by 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. QAF paid out more free cash flow than it generated - 120%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given QAF's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see how much of its profit QAF paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see QAF's earnings per share have dropped 10% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, QAF has lifted its dividend by approximately 9.6% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. QAF is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.