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Don't Race Out To Buy Insurance Australia Group Limited (ASX:IAG) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Insurance Australia Group Limited (ASX:IAG) is about to trade ex-dividend in the next three days. You will need to purchase shares before the 16th of February to receive the dividend, which will be paid on the 30th of March.

Insurance Australia Group's next dividend payment will be AU$0.07 per share. Last year, in total, the company distributed AU$0.14 to shareholders. Calculating the last year's worth of payments shows that Insurance Australia Group has a trailing yield of 2.6% on the current share price of A$5.34. 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.

View our latest analysis for Insurance Australia Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Insurance Australia Group 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.

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?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Insurance Australia 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.

Insurance Australia Group also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Insurance Australia Group has seen its dividend decline 0.6% per annum on average over the past 10 years, which is not great to see.

We update our analysis on Insurance Australia Group every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Should investors buy Insurance Australia Group for the upcoming dividend? It's hard to get past the idea of Insurance Australia Group paying a dividend despite reporting a loss over the past year - especially when the general trend in its earnings also looks to be negative. Insurance Australia Group doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the 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 Insurance Australia Group. Every company has risks, and we've spotted 2 warning signs for Insurance Australia Group you should know about.

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. 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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