Don't Buy Apogee Enterprises, Inc. (NASDAQ:APOG) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
May 02, 2021
NasdaqGS:APOG

Readers hoping to buy Apogee Enterprises, Inc. (NASDAQ:APOG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 7th of May in order to receive the dividend, which the company will pay on the 25th of May.

Apogee Enterprises's next dividend payment will be US$0.20 per share. Last year, in total, the company distributed US$0.80 to shareholders. Calculating the last year's worth of payments shows that Apogee Enterprises has a trailing yield of 2.3% on the current share price of $35.13. 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 Apogee Enterprises can afford its dividend, and if the dividend could grow.

View our latest analysis for Apogee Enterprises

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Apogee Enterprises distributed an unsustainably high 128% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Apogee Enterprises generated enough free cash flow to afford its dividend. Luckily it paid out just 17% of its free cash flow last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Apogee Enterprises fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NasdaqGS:APOG Historic Dividend May 3rd 2021

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 Apogee Enterprises's earnings per share have dropped 23% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Apogee Enterprises has lifted its dividend by approximately 9.4% a year on average. 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. Apogee Enterprises is already paying out 128% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Apogee Enterprises 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 128% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Apogee Enterprises's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Apogee Enterprises and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 3 warning signs for Apogee Enterprises 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.

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This article by Simply Wall St is general in nature. 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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