It looks like Adairs Limited (ASX:ADH) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 9th of September will not receive the dividend, which will be paid on the 24th of September.
Adairs’s next dividend payment will be AU$0.11 per share, on the back of last year when the company paid a total of AU$0.22 to shareholders. Looking at the last 12 months of distributions, Adairs has a trailing yield of approximately 6.5% on its current stock price of A$3.41. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Adairs has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for Adairs
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Adairs paid out more than half (52%) of its earnings last year, which is a regular payout ratio for 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. What’s good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.
It’s positive to see that Adairs’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That’s why it’s comforting to see Adairs’s earnings have been skyrocketing, up 61% per annum for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last five years, Adairs has lifted its dividend by approximately 17% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Should investors buy Adairs for the upcoming dividend? We like Adairs’s growing earnings per share and the fact that – while its payout ratio is around average – it paid out a lower percentage of its cash flow. There’s a lot to like about Adairs, and we would prioritise taking a closer look at it.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Our analysis shows 2 warning signs for Adairs and you should be aware of these before buying any shares.
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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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.
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