Today we’ll take a closer look at Bassett Furniture Industries, Incorporated (NASDAQ:BSET) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
In this case, Bassett Furniture Industries likely looks attractive to investors, given its 3.8% dividend yield and a payment history of over ten years. We’d guess that plenty of investors have purchased it for the income. The company also bought back stock equivalent to around 5.4% of market capitalisation this year.” There are a few simple ways to reduce the risks of buying Bassett Furniture Industries for its dividend, and we’ll go through these below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 89% of Bassett Furniture Industries’s profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. With a cash payout ratio of 1006%, Bassett Furniture Industries’s dividend payments are poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Bassett Furniture Industries paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Bassett Furniture Industries’s ability to maintain its dividend.
With a strong net cash balance, Bassett Furniture Industries investors may not have much to worry about in the near term from a dividend perspective.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Bassett Furniture Industries’s dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was US$0.40 in 2009, compared to US$0.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.3% a year over that time. The dividends haven’t grown at precisely 2.3% every year, but this is a useful way to average out the historical rate of growth.
It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Bassett Furniture Industries has grown its earnings per share at 3.3% per annum over the past five years. Bassett Furniture Industries’s earnings per share have barely grown, which is not ideal – perhaps this is why the company pays out the majority of its earnings to shareholders. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company’s dividend prospects.
To summarise, shareholders should always check that Bassett Furniture Industries’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. Second, earnings growth has been ordinary, and its history of dividend payments is chequered – having cut its dividend at least once in the past. In summary, Bassett Furniture Industries has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Are management backing themselves to deliver performance? Check their shareholdings in Bassett Furniture Industries in our latest insider ownership analysis.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.