Don’t Race Out To Buy Midwich Group plc (LON:MIDW) Just Because It’s Going Ex-Dividend

Midwich Group plc (LON:MIDW) is about to trade ex-dividend in the next three days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company’s books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Midwich Group’s shares before the 21st of May in order to receive the dividend, which the company will pay on the 3rd of July.

The company’s next dividend payment will be UK£0.035 per share, on the back of last year when the company paid a total of UK£0.052 to shareholders. Based on the last year’s worth of payments, Midwich Group has a trailing yield of 3.7% on the current stock price of UK£1.436. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Midwich Group has been able to grow its dividends, or if the dividend might be cut.

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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. Midwich Group reported a loss after tax last year, which means it’s paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don’t cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 21% of its free cash flow as dividends last year, which is conservatively low.

View our latest analysis for Midwich Group

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

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. Midwich Group was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Midwich Group has increased its dividend at approximately 5.5% a year on average.

Remember, you can always get a snapshot of Midwich Group’s financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Has Midwich Group got what it takes to maintain its dividend payments? We’re a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Bottom line: Midwich Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Midwich Group don’t faze you, it’s worth being mindful of the risks involved with this business. To help with this, we’ve discovered 4 warning signs for Midwich Group (1 can’t be ignored!) that you ought to be aware of before buying the shares.

Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.

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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.