Here's Why We're Wary Of Buying River and Mercantile Group's (LON:RIV) For Its Upcoming Dividend
River and Mercantile Group PLC (LON:RIV) is about to trade ex-dividend in the next three days. If you purchase the stock on or after the 22nd of October, you won't be eligible to receive this dividend, when it is paid on the 20th of November.
River and Mercantile Group's next dividend payment will be UK£0.028 per share, on the back of last year when the company paid a total of UK£0.096 to shareholders. Based on the last year's worth of payments, River and Mercantile Group has a trailing yield of 6.4% on the current stock price of £1.4975. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for River and Mercantile Group
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. River and Mercantile Group paid out 140% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.
When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see River and Mercantile Group's earnings per share have dropped 8.8% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past six years, River and Mercantile Group has increased its dividend at approximately 13% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. River and Mercantile Group is already paying out 140% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
Is River and Mercantile Group worth buying for its dividend? Earnings per share are in decline and River and Mercantile Group is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with River and Mercantile Group. Every company has risks, and we've spotted 2 warning signs for River and Mercantile Group you should know about.
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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