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 Extended Stay America, Inc. (NASDAQ:STAY) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 20th of August, you won’t be eligible to receive this dividend, when it is paid on the 4th of September.
Extended Stay America’s upcoming dividend is US$0.23 a share, following on from the last 12 months, when the company distributed a total of US$0.92 per share to shareholders. Based on the last year’s worth of payments, Extended Stay America stock has a trailing yield of around 6.5% on the current share price of $14.11. If you buy this business for its dividend, you should have an idea of whether Extended Stay America’s dividend is reliable and sustainable. As a result, readers should always check whether Extended Stay America has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. It paid out 84% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Extended Stay America generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (87%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Extended Stay America’s earnings per share have been growing at 18% a year for the past five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we’d wonder why management are not reinvesting more in the business.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the past 5 years, Extended Stay America has increased its dividend at approximately 8.9% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Has Extended Stay America got what it takes to maintain its dividend payments? It’s good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That’s why we’re glad to see Extended Stay America’s earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow – 84% and 87% respectively. Overall, it’s not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Wondering what the future holds for Extended Stay America? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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