Collectors Universe, Inc. (NASDAQ:CLCT) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 13th of February will not receive the dividend, which will be paid on the 28th of February.
Collectors Universe’s next dividend payment will be US$0.17 per share. Last year, in total, the company distributed US$0.70 to shareholders. Based on the last year’s worth of payments, Collectors Universe stock has a trailing yield of around 2.6% on the current share price of $26.71. If you buy this business for its dividend, you should have an idea of whether Collectors Universe’s dividend is reliable and sustainable. So we need to investigate whether Collectors Universe can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Collectors Universe paid out a comfortable 50% of its profit last year. 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. Thankfully its dividend payments took up just 38% of the free cash flow it generated, which is a comfortable payout ratio.
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?
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 fall far enough, the company could be forced to cut its dividend. This is why it’s a relief to see Collectors Universe earnings per share are up 9.1% per annum over the last five years. Management have been reinvested more than half of the company’s earnings within the business, and the company has been able to grow earnings with this retained capital. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Collectors Universe’s dividend payments per share have declined at 3.5% per year on average over the past ten years, which is uninspiring. Collectors Universe is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It’s unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
Should investors buy Collectors Universe for the upcoming dividend? Earnings per share have been growing moderately, and Collectors Universe 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. It might be nice to see earnings growing faster, but Collectors Universe is being conservative with its dividend payouts and could still perform reasonably over the long run. It’s a promising combination that should mark this company worthy of closer attention.
Curious about whether Collectors Universe has been able to consistently generate growth? Here’s a chart of its historical revenue and earnings growth.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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