Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see CDK Global, Inc. (NASDAQ:CDK) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 30th of August in order to be eligible for this dividend, which will be paid on the 27th of September.
CDK Global’s next dividend payment will be US$0.15 per share, on the back of last year when the company paid a total of US$0.60 to shareholders. Calculating the last year’s worth of payments shows that CDK Global has a trailing yield of 1.4% on the current share price of $42.61. If you buy this business for its dividend, you should have an idea of whether CDK Global’s dividend is reliable and sustainable. 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. Fortunately CDK Global’s payout ratio is modest, at just 32% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The good news is it paid out just 19% of its free cash flow in the last year.
It’s positive to see that CDK Global’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?
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. This is why it’s a relief to see CDK Global earnings per share are up 5.6% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. 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.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past 5 years, CDK Global has increased its dividend at approximately 4.6% 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
From a dividend perspective, should investors buy or avoid CDK Global? Earnings per share have been growing moderately, and CDK Global 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. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and CDK Global is halfway there. There’s a lot to like about CDK Global, and we would prioritise taking a closer look at it.
Curious what other investors think of CDK Global? 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.