Should You Buy Bega Cheese Limited (ASX:BGA) For Its Upcoming Dividend?

By
Simply Wall St
Published
August 29, 2021
ASX:BGA
Source: Shutterstock

It looks like Bega Cheese Limited (ASX:BGA) is about to go ex-dividend in the next 2 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Bega Cheese's shares on or after the 1st of September, you won't be eligible to receive the dividend, when it is paid on the 24th of September.

The company's upcoming dividend is AU$0.05 a share, following on from the last 12 months, when the company distributed a total of AU$0.10 per share to shareholders. Based on the last year's worth of payments, Bega Cheese stock has a trailing yield of around 1.8% on the current share price of A$5.51. 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 Bega Cheese has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Bega Cheese

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. A useful secondary check can be to evaluate whether Bega Cheese generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 29% of the free cash flow it generated, which is a comfortable payout ratio.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
ASX:BGA Historic Dividend August 29th 2021

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. With that in mind, we're encouraged by the steady growth at Bega Cheese, with earnings per share up 7.7% on average over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.

We'd also point out that Bega Cheese issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Bega Cheese has increased its dividend at approximately 5.2% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Bega Cheese for the upcoming dividend? Earnings per share growth has been growing somewhat, and Bega Cheese is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Bega Cheese is halfway there. It's a promising combination that should mark this company worthy of closer attention.

On that note, you'll want to research what risks Bega Cheese is facing. For example - Bega Cheese has 1 warning sign we think you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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