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 Brambles Limited (ASX:BXB) is about to go ex-dividend in just 3 days. You can purchase shares before the 11th of September in order to receive the dividend, which the company will pay on the 10th of October.
Brambles’s upcoming dividend is US$0.14 a share, following on from the last 12 months, when the company distributed a total of US$0.19 per share to shareholders. Based on the last year’s worth of payments, Brambles stock has a trailing yield of around 2.5% on the current share price of A$11.27. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Brambles can afford its dividend, and if the dividend could grow.
View our latest analysis for Brambles
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. Brambles is paying out an acceptable 71% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 303% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Brambles is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
Brambles paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough cash to cover the dividend. Cash is king, as they say, and were Brambles to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Brambles’s earnings per share have fallen at approximately 5.3% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Brambles has seen its dividend decline 1.3% per annum on average over the past ten years, which is not great to see.
To Sum It Up
From a dividend perspective, should investors buy or avoid Brambles? Brambles had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It’s not that we think Brambles is a bad company, but these characteristics don’t generally lead to outstanding dividend performance.
Curious what other investors think of Brambles? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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.
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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. Thank you for reading.