Here's Why We're Wary Of Buying Adacel Technologies Limited's (ASX:ADA) For Its Upcoming Dividend

Simply Wall St

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 Adacel Technologies Limited (ASX:ADA) is about to go ex-dividend in just 4 days. You can purchase shares before the 27th of February in order to receive the dividend, which the company will pay on the 15th of April.

Adacel Technologies's next dividend payment will be AU$0.01 per share, and in the last 12 months, the company paid a total of AU$0.02 per share. Looking at the last 12 months of distributions, Adacel Technologies has a trailing yield of approximately 2.4% on its current stock price of A$0.84. 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.

See our latest analysis for Adacel Technologies

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. Adacel Technologies lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. 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. Adacel Technologies paid out more free cash flow than it generated - 143%, 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.

Click here to see how much of its profit Adacel Technologies paid out over the last 12 months.

ASX:ADA Historical Dividend Yield, February 22nd 2020

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. Adacel Technologies reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last five years, Adacel Technologies has lifted its dividend by approximately 5.9% a year on average.

Get our latest analysis on Adacel Technologies's balance sheet health here.

The Bottom Line

Is Adacel Technologies worth buying for its dividend? It's hard to get used to Adacel Technologies paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not that we think Adacel Technologies is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious about whether Adacel Technologies has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

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.

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