ISA Holdings Limited (JSE:ISA) is about to trade ex-dividend in the next three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company’s books as a shareholder in order to receive the 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. This means that investors who purchase ISA Holdings’ shares on or after the 16th of July will not receive the dividend, which will be paid on the 21st of July.
The company’s upcoming dividend is R00.167 a share, following on from the last 12 months, when the company distributed a total of R0.17 per share to shareholders. Looking at the last 12 months of distributions, ISA Holdings has a trailing yield of approximately 9.6% on its current stock price of R01.74. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year ISA Holdings paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by 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 70% of its free cash flow as dividends, within the usual range for most companies.
It’s good to see that while ISA Holdings’s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we’d be concerned about whether the dividend is sustainable in a downturn.
See our latest analysis for ISA Holdings
Click here to see how much of its profit ISA Holdings paid out over the last 12 months.
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. With that in mind, we’re encouraged by the steady growth at ISA Holdings, with earnings per share up 2.1% on average over the last five years.