Integral Diagnostics Limited (ASX:IDX) is about to trade ex-dividend in the next 3 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Integral Diagnostics' shares on or after the 6th of March will not receive the dividend, which will be paid on the 7th of April.

The company's next dividend payment will be AU$0.025 per share, on the back of last year when the company paid a total of AU$0.058 to shareholders. Last year's total dividend payments show that Integral Diagnostics has a trailing yield of 2.7% on the current share price of AU$2.13. 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 investigate whether Integral Diagnostics can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Integral Diagnostics

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Integral Diagnostics paid out a disturbingly high 247% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 40% of the free cash flow it generated, which is a comfortable payout ratio.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Integral Diagnostics fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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. Integral Diagnostics's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 35% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Integral Diagnostics has delivered 4.2% dividend growth per year on average over the past nine years. 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. Integral Diagnostics is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Integral Diagnostics got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 247% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Integral Diagnostics's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Integral Diagnostics is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Integral Diagnostics as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 4 warning signs for Integral Diagnostics (2 are significant) you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.