Karat Packaging (NASDAQ:KRT) Is Increasing Its Dividend To $0.45

The board of Karat Packaging Inc. (NASDAQ:KRT) has announced that it will be paying its dividend of $0.45 on the 28th of February, an increased payment from last year's comparable dividend. This takes the dividend yield to 5.4%, which shareholders will be pleased with.

See our latest analysis for Karat Packaging

Karat Packaging's Future Dividends May Potentially Be At Risk

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Karat Packaging was paying out 85% of earnings and more than 75% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.

Over the next year, EPS is forecast to expand by 21.2%. If the dividend continues on its recent course, the payout ratio in 12 months could be 155%, 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 2023 to the most recent total annual payment of $1.75. This implies that the company grew its distributions at a yearly rate of about 124% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Karat Packaging Might Find It Hard To Grow Its Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Karat Packaging has impressed us by growing EPS at 65% per year over the past five years. EPS is growing rapidly, although the company is also paying out a large portion of its profits as dividends. If earnings keep growing, the dividend may be sustainable, but generally we'd prefer to see a fast growing company reinvest in further growth.

Our Thoughts On Karat Packaging's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. 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.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Karat Packaging that you should be aware of before investing. Is Karat Packaging not quite the opportunity you were looking for? Why not check out 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.