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 Brinker International, Inc. (NYSE:EAT) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 5th of March will not receive this dividend, which will be paid on the 26th of March.
Brinker International’s next dividend payment will be US$0.38 per share, on the back of last year when the company paid a total of US$1.52 to shareholders. Based on the last year’s worth of payments, Brinker International stock has a trailing yield of around 4.4% on the current share price of $34.35. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.
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. That’s why it’s good to see Brinker International paying out a modest 41% of its earnings. A useful secondary check can be to evaluate whether Brinker International generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 36% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Brinker International’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.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it’s a relief to see Brinker International earnings per share are up 9.9% per annum over the last five years. Management have been reinvested more than half of the company’s earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Brinker International has increased its dividend at approximately 13% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Should investors buy Brinker International for the upcoming dividend? Earnings per share have been growing moderately, and Brinker International is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Brinker International is being conservative with its dividend payouts and could still perform reasonably over the long run. Brinker International looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
Curious what other investors think of Brinker International? See what analysts 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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