Don't Buy The Becker Milk Company Limited (TSE:BEK.B) For Its Next Dividend Without Doing These Checks

Readers hoping to buy The Becker Milk Company Limited (TSE:BEK.B) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 22nd of March in order to be eligible for this dividend, which will be paid on the 31st of March.

Becker Milk's next dividend payment will be CA$0.40 per share, on the back of last year when the company paid a total of CA$0.80 to shareholders. Calculating the last year's worth of payments shows that Becker Milk has a trailing yield of 5.7% on the current share price of CA$14. If you buy this business for its dividend, you should have an idea of whether Becker Milk's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Becker Milk

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Becker Milk distributed an unsustainably high 200% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out an unsustainably high 297% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Cash is slightly more important than profit from a dividend perspective, but given Becker Milk's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Becker Milk paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Becker Milk's earnings per share have dropped 17% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Becker Milk has lifted its dividend by approximately 2.9% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Becker Milk is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Becker Milk worth buying for its dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (200%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Becker Milk. Be aware that Becker Milk is showing 5 warning signs in our investment analysis, and 1 of those is significant...

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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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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