Today we'll take a closer look at Flexsteel Industries, Inc. (NASDAQ:FLXS) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A 1.1% yield is nothing to get excited about, but investors probably think the long payment history suggests Flexsteel Industries has some staying power. The company also bought back stock during the year, equivalent to approximately 4.3% of the company's market capitalisation at the time. Remember though, due to the recent spike in its share price, Flexsteel Industries's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple research can reduce the risk of buying Flexsteel Industries for its dividend - read on to learn more.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although Flexsteel Industries pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Flexsteel Industries paid out a conservative 36% of its free cash flow as dividends last year.
While the above analysis focuses on dividends relative to a company's earnings, we do note Flexsteel Industries' strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Flexsteel Industries every 24 hours, so you can always get our latest analysis of its financial health, here.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Flexsteel Industries has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was US$0.2 in 2011, compared to US$0.4 last year. Dividends per share have grown at approximately 7.2% per year over this 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 good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Flexsteel Industries might have put its house in order since then, but we remain cautious.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Flexsteel Industries' EPS have fallen by approximately 58% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
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. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share are down, and Flexsteel Industries' dividend has been cut at least once in the past, which is disappointing. Overall, Flexsteel Industries falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 2 warning signs for Flexsteel Industries you should be aware of, and 1 of them is potentially serious.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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Flexsteel Industries, Inc., together with its subsidiaries, operates as a manufacturer, importer, and online marketer of upholstered furniture for residential and contract markets in the United States.
Good value with adequate balance sheet.