Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Kronos Worldwide, Inc. (NYSE:KRO) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 2nd of March in order to be eligible for this dividend, which will be paid on the 12th of March.
Kronos Worldwide’s next dividend payment will be US$0.18 per share, and in the last 12 months, the company paid a total of US$0.72 per share. Last year’s total dividend payments show that Kronos Worldwide has a trailing yield of 6.9% on the current share price of $10.36. If you buy this business for its dividend, you should have an idea of whether Kronos Worldwide’s dividend is reliable and sustainable. As a result, readers should always check whether Kronos Worldwide has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. It paid out 81% 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. We’d be concerned if earnings began to decline. 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. Kronos Worldwide paid out more free cash flow than it generated – 141%, to be precise – last year, which we think is concerningly high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.
While Kronos Worldwide’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Kronos Worldwide’s ability to maintain its dividend.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It’s encouraging to see Kronos Worldwide has grown its earnings rapidly, up 37% a year for the past five years. Earnings have been growing quickly, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past nine years, Kronos Worldwide has increased its dividend at approximately 4.1% a year on average. It’s good to see both earnings and the dividend have improved – although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Should investors buy Kronos Worldwide for the upcoming dividend? Earnings per share growth is a positive, and the company’s payout ratio looks normal. However, we note Kronos Worldwide paid out a much higher percentage of its free cash flow, which makes us uncomfortable. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we’re not all that optimistic on its dividend prospects.
Ever wonder what the future holds for Kronos Worldwide? See what the two 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.
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.
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