Today we'll take a closer look at K-Bro Linen Inc. (TSE:KBL) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
A high yield and a long history of paying dividends is an appealing combination for K-Bro Linen. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying K-Bro Linen for its dividend, and we'll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. K-Bro Linen paid out 249% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. K-Bro Linen's cash payout ratio in the last year was 33%, which suggests dividends were well covered by cash generated by the business. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and K-Bro Linen fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Consider getting our latest analysis on K-Bro Linen's financial position here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. K-Bro Linen has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was CA$1.1 in 2010, compared to CA$1.2 last year. Its dividends have grown at less than 1% per annum over this time frame.
Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. K-Bro Linen's EPS have fallen by approximately 22% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and K-Bro Linen's earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that K-Bro Linen's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that K-Bro Linen paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and K-Bro Linen's dividend has been cut at least once in the past, which is disappointing. In summary, K-Bro Linen has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.
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. Case in point: We've spotted 2 warning signs for K-Bro Linen (of which 1 is significant!) you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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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