Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Resources Connection, Inc. (NASDAQ:RECN) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 21st of August in order to be eligible for this dividend, which will be paid on the 19th of September.
Resources Connection’s next dividend payment will be US$0.14 per share, on the back of last year when the company paid a total of US$0.52 to shareholders. Calculating the last year’s worth of payments shows that Resources Connection has a trailing yield of 3.3% on the current share price of $16.98. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether Resources Connection can afford its dividend, and if the dividend could grow.
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. Resources Connection paid out 52% of its earnings to investors last year, a normal payout level for most businesses. 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. Fortunately, it paid out only 44% of its free cash flow in the past year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Resources Connection’s earnings per share have been growing at 14% a year for the past five years. Resources Connection has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Resources Connection has delivered an average of 15% per year annual increase in its dividend, based on the past 9 years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
Has Resources Connection got what it takes to maintain its dividend payments? We like Resources Connection’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. It’s a promising combination that should mark this company worthy of closer attention.
Wondering what the future holds for Resources Connection? 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.
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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.