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Don't Race Out To Buy EMIS Group plc (LON:EMIS) Just Because It's Going Ex-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 EMIS Group plc (LON:EMIS) is about to go ex-dividend in just 3 days. Investors can purchase shares before the 9th of April in order to be eligible for this dividend, which will be paid on the 11th of May.

EMIS Group's next dividend payment will be UK£0.16 per share, on the back of last year when the company paid a total of UK£0.31 to shareholders. Looking at the last 12 months of distributions, EMIS Group has a trailing yield of approximately 3.0% on its current stock price of £10.54. If you buy this business for its dividend, you should have an idea of whether EMIS Group's dividend is reliable and sustainable. As a result, readers should always check whether EMIS Group has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for EMIS Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 88% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. 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 58% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that EMIS Group'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 the company's payout ratio, plus analyst estimates of its future dividends.

AIM:EMIS Historical Dividend Yield April 5th 2020
AIM:EMIS Historical Dividend Yield April 5th 2020

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that EMIS Group's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. EMIS Group has delivered 11% dividend growth per year on average over the past ten years.

The Bottom Line

Should investors buy EMIS Group for the upcoming dividend? While earnings per share are flat, at least EMIS Group has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. It's not that we think EMIS Group is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for EMIS Group? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.