Should Income Investors Look At Caffyns plc (LON:CFYN) Before Its Ex-Dividend?

Caffyns plc (LON:CFYN) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Caffyns' shares before the 14th of December in order to be eligible for the dividend, which will be paid on the 12th of January.

The company's next dividend payment will be UK£0.05 per share, on the back of last year when the company paid a total of UK£0.23 to shareholders. Looking at the last 12 months of distributions, Caffyns has a trailing yield of approximately 4.1% on its current stock price of £5.5. If you buy this business for its dividend, you should have an idea of whether Caffyns's dividend is reliable and sustainable. So we need to investigate whether Caffyns can afford its dividend, and if the dividend could grow.

See our latest analysis for Caffyns

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see Caffyns paying out a modest 42% of its earnings. A useful secondary check can be to evaluate whether Caffyns generated enough free cash flow to afford its dividend. Dividends consumed 56% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Caffyns's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Caffyns, with earnings per share up 4.5% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Caffyns has lifted its dividend by approximately 6.5% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Caffyns an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest, and it's interesting that Caffyns is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. To summarise, Caffyns looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So while Caffyns looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 3 warning signs for Caffyns and you should be aware of these before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.