Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Toll Brothers, Inc. (NYSE:TOL) is about to trade ex-dividend in the next 2 days. Ex-dividend means that investors that purchase the stock on or after the 8th of April will not receive this dividend, which will be paid on the 24th of April.
Toll Brothers’s upcoming dividend is US$0.11 a share, following on from the last 12 months, when the company distributed a total of US$0.44 per share to shareholders. Looking at the last 12 months of distributions, Toll Brothers has a trailing yield of approximately 2.5% on its current stock price of $17.85. 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! As a result, readers should always check whether Toll Brothers has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for Toll Brothers
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Toll Brothers has a low and conservative payout ratio of just 12% of its income after tax. A useful secondary check can be to evaluate whether Toll Brothers generated enough free cash flow to afford its dividend. Fortunately, it paid out only 38% 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.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see Toll Brothers’s earnings per share have risen 14% per annum over the last five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination – plus the dividend can always be increased later.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Toll Brothers has delivered 11% dividend growth per year on average over the past three years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
Final Takeaway
Is Toll Brothers worth buying for its dividend? We love that Toll Brothers is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It’s a promising combination that should mark this company worthy of closer attention.
In light of that, while Toll Brothers has an appealing dividend, it’s worth knowing the risks involved with this stock. Every company has risks, and we’ve spotted 3 warning signs for Toll Brothers (of which 1 is a bit unpleasant!) you should know about.
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 editorial-team@simplywallst.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.
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. Thank you for reading.