DFS Furniture plc (LON:DFS) Looks Interesting, And It's About To Pay A Dividend

It looks like DFS Furniture plc (LON:DFS) is about to go ex-dividend in the next three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. 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. Accordingly, DFS Furniture investors that purchase the stock on or after the 30th of November will not receive the dividend, which will be paid on the 29th of December.

The company's next dividend payment will be UK£0.03 per share, on the back of last year when the company paid a total of UK£0.045 to shareholders. Based on the last year's worth of payments, DFS Furniture stock has a trailing yield of around 4.2% on the current share price of £1.07. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether DFS Furniture has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for DFS Furniture

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately DFS Furniture's payout ratio is modest, at just 46% of profit. A useful secondary check can be to evaluate whether DFS Furniture generated enough free cash flow to afford its dividend. The good news is it paid out just 14% of its free cash flow in the last year.

It's positive to see that DFS Furniture'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 the company's payout ratio, plus analyst estimates of its future dividends.

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at DFS Furniture, with earnings per share up 2.4% on average over the last five years. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. DFS Furniture has seen its dividend decline 3.5% per annum on average over the past nine years, which is not great to see. DFS Furniture is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Should investors buy DFS Furniture for the upcoming dividend? Earnings per share growth has been growing somewhat, and DFS Furniture is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but DFS Furniture is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about DFS Furniture, and we would prioritise taking a closer look at it.

So while DFS Furniture looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Be aware that DFS Furniture is showing 3 warning signs in our investment analysis, and 1 of those is significant...

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.