K-Bro Linen (TSE:KBL) Has Re-Affirmed Its Dividend Of CA$0.10

The board of K-Bro Linen Inc. (TSE:KBL) has announced that it will pay a dividend of CA$0.10 per share on the 15th of February. This means the annual payment is 3.2% of the current stock price, which is above the average for the industry.

Check out our latest analysis for K-Bro Linen

K-Bro Linen's Earnings Easily Cover the Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, K-Bro Linen's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Over the next year, EPS is forecast to expand by 153.0%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 49% which brings it into quite a comfortable range.

K-Bro Linen Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the dividend has gone from CA$1.10 to CA$1.20. Dividend payments have grown at less than 1% a year over this period. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth May Be Hard To Come By

Investors could be attracted to the stock based on the quality of its payment history. However, things aren't all that rosy. Over the past five years, it looks as though K-Bro Linen's EPS has declined at around 9.5% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

In Summary

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about K-Bro Linen's payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We don't think K-Bro Linen is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for K-Bro Linen that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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