Stock Analysis

Why It Might Not Make Sense To Buy Keller Group plc (LON:KLR) For Its Upcoming Dividend

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LSE:KLR
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It looks like Keller Group plc (LON:KLR) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 26th of November in order to be eligible for this dividend, which will be paid on the 18th of December.

Keller Group's next dividend payment will be UK£0.13 per share, on the back of last year when the company paid a total of UK£0.36 to shareholders. Calculating the last year's worth of payments shows that Keller Group has a trailing yield of 5.4% on the current share price of £6.59. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Keller Group can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Keller Group

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Keller Group paid out 93% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 4.6% of its free cash flow in the last year.

It's good to see that while Keller Group'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 the company's payout ratio, plus analyst estimates of its future dividends.

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LSE:KLR Historic Dividend November 22nd 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Keller Group's earnings per share have dropped 16% 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. Keller Group has delivered an average of 5.1% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Keller Group 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.

Final Takeaway

Is Keller Group an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 93% 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. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Keller Group.

So if you're still interested in Keller Group despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 3 warning signs with Keller Group and understanding them should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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