Karat Packaging (NASDAQ:KRT) Has Announced A Dividend Of $0.40

Karat Packaging Inc. (NASDAQ:KRT) will pay a dividend of $0.40 on the 29th of November. This will take the annual payment to 5.9% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for Karat Packaging

Karat Packaging's Future Dividends May Potentially Be At Risk

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Karat Packaging's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 96% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Over the next year, EPS is forecast to expand by 25.9%. If the dividend continues on its recent course, the payout ratio in 12 months could be 136%, which is a bit high and could start applying pressure to the balance sheet.

Karat Packaging's Dividend Has Lacked Consistency

Looking back, the dividend has been unstable but with a relatively short history, we think it may be a bit early to draw conclusions about long term dividend sustainability. The dividend has gone from an annual total of $0.35 in 2022 to the most recent total annual payment of $1.75. This means that it has been growing its distributions at 124% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Karat Packaging has seen EPS rising for the last five years, at 65% per annum. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Karat Packaging hasn't been doing.

Karat Packaging's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Karat Packaging's payments are rock solid. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Karat Packaging that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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