Is It Smart To Buy K-Bro Linen Inc. (TSE:KBL) Before It Goes Ex-Dividend?

It looks like K-Bro Linen Inc. (TSE:KBL) is about to go ex-dividend in the next three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. In other words, investors can purchase K-Bro Linen's shares before the 31st of March in order to be eligible for the dividend, which will be paid on the 15th of April.

The company's next dividend payment will be CA$0.10 per share, and in the last 12 months, the company paid a total of CA$1.20 per share. Based on the last year's worth of payments, K-Bro Linen has a trailing yield of 3.5% on the current stock price of CA$34.24. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. K-Bro Linen paid out more than half (67%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether K-Bro Linen generated enough free cash flow to afford its dividend. Fortunately, it paid out only 41% of its free cash flow in the past year.

It's positive to see that K-Bro Linen'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.

Check out our latest analysis for K-Bro Linen

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, K-Bro Linen's earnings per share have been growing at 11% a year for the past five years. K-Bro Linen has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the K-Bro Linen dividends are largely the same as they were 10 years ago.

The Bottom Line

From a dividend perspective, should investors buy or avoid K-Bro Linen? K-Bro Linen's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. In terms of investment risks, we've identified 1 warning sign with K-Bro Linen and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are 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.