JB Hi-Fi Limited (ASX:JBH) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 22nd of August in order to be eligible for this dividend, which will be paid on the 6th of September.
JB Hi-Fi's next dividend payment will be AU$0.51 per share, on the back of last year when the company paid a total of AU$1.42 to shareholders. Based on the last year's worth of payments, JB Hi-Fi stock has a trailing yield of around 4.6% on the current share price of A$31.05. If you buy this business for its dividend, you should have an idea of whether JB Hi-Fi's dividend is reliable and sustainable. As a result, readers should always check whether JB Hi-Fi has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for JB Hi-Fi
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. JB Hi-Fi paid out more than half (65%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (65%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that JB Hi-Fi's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. 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 JB Hi-Fi's earnings per share have risen 11% per annum over the last five years. JB Hi-Fi is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. JB Hi-Fi has delivered an average of 16% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Final Takeaway
Should investors buy JB Hi-Fi for the upcoming dividend? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we'd also note that JB Hi-Fi is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of JB Hi-Fi's dividend merits.
Curious what other investors think of JB Hi-Fi? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
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.
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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. Thank you for reading.