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Dividend paying stocks like Crown Crafts, Inc. (NASDAQ:CRWS) tend to be popular with investors, and for good reason – some research shows that a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
In this case, Crown Crafts likely looks attractive to dividend investors, given its 6.2% dividend yield and nine-year payment history. We’d agree the yield does look enticing. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.Explore this interactive chart for our latest analysis on Crown Crafts!
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Crown Crafts paid out 66% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Crown Crafts paid out 87% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances.
We update our data on Crown Crafts every 24 hours, so you can always get our latest analysis of its financial health, here.
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. The first recorded dividend for Crown Crafts, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we’re cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was US$0.08 in 2010, compared to US$0.32 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
It’s not great to see that the payment has been cut in the past. We’re generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Over the past five years, it looks as though Crown Crafts’s EPS have declined at around 1.5% a year. A slight decline in earnings per share may not be a huge immediate concern. However, the best dividend stocks are all able to generate earnings growth over the long term.
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. Crown Crafts’s is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. Earnings per share are down, and Crown Crafts’s dividend has been cut at least once in the past, which is disappointing. In summary, Crown Crafts has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.
Now, if you want to look closer, it would be worth checking out our free research on Crown Crafts management tenure, salary, and performance.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.