Stock Analysis

Why It Might Not Make Sense To Buy Brd. Klee A/S (CPH:KLEE B) For Its Upcoming Dividend

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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Brd. Klee A/S (CPH:KLEE B) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 22nd of January will not receive this dividend, which will be paid on the 26th of January.

Brd. Klee's next dividend payment will be kr.85.14 per share. Last year, in total, the company distributed kr.85.14 to shareholders. Based on the last year's worth of payments, Brd. Klee has a trailing yield of 3.1% on the current stock price of DKK2780. 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 investigate whether Brd. Klee can afford its dividend, and if the dividend could grow.

See our latest analysis for Brd. Klee

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. Brd. Klee paid out 90% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Brd. Klee's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

CPSE:KLEE B Historic Dividend January 18th 2021

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Brd. Klee's earnings per share have fallen at approximately 7.6% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Brd. Klee's dividend payments per share have declined at 13% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Brd. Klee? It's never great to see earnings per share declining, especially when a company is paying out 90% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Brd. Klee don't faze you, it's worth being mindful of the risks involved with this business. For example, Brd. Klee has 4 warning signs (and 1 which is concerning) we think you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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