Dividend paying stocks like Barrett Business Services, Inc. (NASDAQ:BBSI) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
While Barrett Business Services's 1.7% dividend yield is not the highest, we think its lengthy payment history is quite interesting. That said, the recent jump in the share price will make Barrett Business Services's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Barrett Business Services for its dividend, and we'll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Barrett Business Services paid out 24% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Barrett Business Services pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.
With a strong net cash balance, Barrett Business Services investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Barrett Business Services' latest financial position, by checking our visualisation of its financial health.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Barrett Business Services has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was US$0.3 in 2010, compared to US$1.2 last year. Dividends per share have grown at approximately 14% per year over this time.
With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Earnings have grown at around 9.9% a year for the past five years, which is better than seeing them shrink! With a decent amount of growth and a low payout ratio, we think this bodes well for Barrett Business Services's prospects of growing its dividend payments in the future.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Barrett Business Services has a low payout ratio, which we like, although it paid out virtually all of its generated cash. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Overall we think Barrett Business Services is an interesting dividend stock, although it could be better.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come accross 4 warning signs for Barrett Business Services you should be aware of, and 1 of them shouldn't be ignored.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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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