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Don’t buy Strategic Education, Inc. (NASDAQ: STRA) for its next dividend without doing these checks

Readers wishing to buy Strategic Education, Inc. (NASDAQ: STRA) for its dividend will have to make its move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company’s registration date, which is the date the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because every time a stock is bought or sold, the transaction takes at least two business days to settle. This means that investors who buy Strategic Education shares from November 26 will not receive the dividend, which will be paid on December 6.

The company’s upcoming dividend is US $ 0.60 per share, continuing the past 12 months when the company distributed a total of US $ 2.40 per share to shareholders. Looking at the last 12 months of distributions, Strategic Education has a sliding return of about 4.2% on its current price of $ 57.65. Dividends are an important source of income for many shareholders, but the health of the business is crucial to sustaining these dividends. That is why we should always check whether dividend payments seem sustainable and whether the business is growing.

Check out our latest analysis for strategic education

If a company pays more dividends than it has earned, then the dividend could become unsustainable – which is not an ideal situation. Last year, Strategic Education distributed 146% of its profits as dividends to shareholders. Without more sustainable payment behavior, the dividend seems precarious. Yet cash flow is usually more important than earnings in assessing dividend sustainability, so we always need to check whether the company has generated enough cash to pay its dividend. It paid more than half (59%) of its free cash flow in the past year, which is within an average range for most companies.

It is disappointing that the dividend was not covered by earnings, but cash is more important from a dividend sustainability perspective, and Strategic Education has fortunately generated enough cash to fund its dividend. Still, if the company were to repeatedly pay a dividend greater than its profits, we would be concerned. Extraordinarily few companies are able to persistently pay out a dividend in excess of their profits.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

NasdaqGS: STRA Historic dividend November 21, 2021

Have profits and dividends increased?

Companies with declining profits are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold massively at the same time. Strategic Education’s earnings per share have fallen about 16% per year over the past five years. When earnings per share decline, the maximum amount of dividends that can be paid also decreases.

Another key way to measure a company’s dividend outlook is to measure its historical rate of dividend growth. Strategic Education has seen its dividend fall by 5.0% per year on average over the past 10 years, which is not great to see. It’s never nice to watch profits and dividends go down, but at least management has reduced the dividend rather than potentially risking the health of the company in an attempt to maintain it.

To summarize

Does Strategic Education have what it takes to maintain its dividend payments? Earnings per share are down, which is not encouraging. In addition, Strategic Education pays the majority of its profits and more than half of its free cash flow. It is difficult to say if the company has the financial resources and the time to turn things around without reducing the dividend. It’s not that we think Strategic Education is a bad company, but these characteristics don’t usually lead to outstanding dividend performance.

So if you are still interested in strategic education despite its low dividend qualities, you should be well informed about some of the risks that this stock faces. Every business has risks, and we have spotted 4 warning signs for strategic education you should know.

A common investment mistake is to buy the first interesting stock you see. Here you will find a list of promising dividend paying stocks with a yield above 2% and an upcoming dividend.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.

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