Should You Buy Capral Limited (ASX:CAA) For Its Upcoming Dividend?

Readers hoping to buy Capral Limited (ASX:CAA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 10th of March, you won't be eligible to receive this dividend, when it is paid on the 26th of March.

Capral's next dividend payment will be AU$0.45 per share, on the back of last year when the company paid a total of AU$0.45 to shareholders. Calculating the last year's worth of payments shows that Capral has a trailing yield of 6.7% on the current share price of A$6.7. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Capral

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. Fortunately Capral's payout ratio is modest, at just 29% of profit. A useful secondary check can be to evaluate whether Capral generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 5.0% of its cash flow last 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 how much of its profit Capral paid out over the last 12 months.

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. With that in mind, we're encouraged by the steady growth at Capral, with earnings per share up 3.2% on average over the last five years. Earnings per share growth in recent times has not been a standout. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Capral has delivered 4.7% dividend growth per year on average over the past four years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Capral? Earnings per share growth has been growing somewhat, and Capral 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. It might be nice to see earnings growing faster, but Capral is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Capral, and we would prioritise taking a closer look at it.

While it's tempting to invest in Capral for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 4 warning signs for Capral you should know about.

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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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. 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.
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