It looks like Kathmandu Holdings Limited (NZSE:KMD) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Kathmandu Holdings' shares on or after the 29th of November, you won't be eligible to receive the dividend, when it is paid on the 15th of December.
The company's next dividend payment will be NZ$0.03 per share. Last year, in total, the company distributed NZ$0.06 to shareholders. Last year's total dividend payments show that Kathmandu Holdings has a trailing yield of 3.9% on the current share price of NZ$1.53. If you buy this business for its dividend, you should have an idea of whether Kathmandu Holdings's dividend is reliable and sustainable. So we need to investigate whether Kathmandu Holdings can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Kathmandu Holdings paid out 56% of its earnings to investors last year, a normal payout level for most businesses. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 9.6% of its cash flow last year.
It's positive to see that Kathmandu Holdings'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.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Kathmandu Holdings's earnings per share have plummeted approximately 100% a year over the previous five years.
Kathmandu Holdings also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Kathmandu Holdings's dividend payments are broadly unchanged compared to where they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.
Should investors buy Kathmandu Holdings for the upcoming dividend? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. Overall, it's hard to get excited about Kathmandu Holdings from a dividend perspective.
So if you want to do more digging on Kathmandu Holdings, you'll find it worthwhile knowing the risks that this stock faces. To help with this, we've discovered 2 warning signs for Kathmandu Holdings that you should be aware of before investing in their shares.
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.
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.
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