Collins Foods (ASX:CKF) Is Due To Pay A Dividend Of A$0.125

The board of Collins Foods Limited (ASX:CKF) has announced that it will pay a dividend on the 28th of December, with investors receiving A$0.125 per share. This will take the dividend yield to an attractive 2.4%, providing a nice boost to shareholder returns.

See our latest analysis for Collins Foods

Collins Foods' Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, Collins Foods' profits didn't cover the dividend, but the company was generating enough cash instead. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Analysts expect a massive rise in earnings per share in the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 37% which is fairly sustainable.

Collins Foods Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2013, the annual payment back then was A$0.11, compared to the most recent full-year payment of A$0.27. This works out to be a compound annual growth rate (CAGR) of approximately 9.4% a year over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

Dividend Growth May Be Hard To Come By

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren't as good as they seem. Collins Foods has seen earnings per share falling at 6.2% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We don't think Collins Foods is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Collins Foods has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.