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Here's What We Like About Adairs' (ASX:ADH) Upcoming Dividend

Adairs Limited (ASX:ADH) stock is about to trade ex-dividend in four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Adairs' shares before the 8th of September in order to be eligible for the dividend, which will be paid on the 23rd of September.

The company's next dividend payment will be AU$0.10 per share. Last year, in total, the company distributed AU$0.23 to shareholders. Looking at the last 12 months of distributions, Adairs has a trailing yield of approximately 5.9% on its current stock price of A$3.92. If you buy this business for its dividend, you should have an idea of whether Adairs's dividend is reliable and sustainable. So we need to investigate whether Adairs can afford its dividend, and if the dividend could grow.

View our latest analysis for Adairs

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. Adairs paid out 61% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Adairs generated enough free cash flow to afford its dividend. Fortunately, it paid out only 38% of its free cash flow in the past year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Adairs's earnings per share have risen 18% per annum over the last five years. Adairs has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, six years ago, Adairs has lifted its dividend by approximately 15% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

Should investors buy Adairs for the upcoming dividend? We like Adairs's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Adairs for the dividends alone, you should always be mindful of the risks involved. For example, we've found 1 warning sign for Adairs that we recommend you consider before investing in the business.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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