Stock Analysis

It Might Not Be A Great Idea To Buy Flexsteel Industries, Inc. (NASDAQ:FLXS) For Its Next Dividend

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NasdaqGS:FLXS
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Readers hoping to buy Flexsteel Industries, Inc. (NASDAQ:FLXS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 16th of March in order to receive the dividend, which the company will pay on the 29th of March.

Flexsteel Industries's upcoming dividend is US$0.15 a share, following on from the last 12 months, when the company distributed a total of US$0.40 per share to shareholders. Looking at the last 12 months of distributions, Flexsteel Industries has a trailing yield of approximately 1.6% on its current stock price of $36.76. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Flexsteel Industries

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Flexsteel Industries reported a loss last year, so it's not great to see that it has continued paying a dividend. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Flexsteel Industries didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Flexsteel Industries paid out more free cash flow than it generated - 126%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Flexsteel Industries does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Click here to see how much of its profit Flexsteel Industries paid out over the last 12 months.

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NasdaqGS:FLXS Historic Dividend March 11th 2021

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Flexsteel Industries was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Flexsteel Industries has lifted its dividend by approximately 12% a year on average.

Remember, you can always get a snapshot of Flexsteel Industries's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

From a dividend perspective, should investors buy or avoid Flexsteel Industries? It's hard to get used to Flexsteel Industries paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Flexsteel Industries.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Flexsteel Industries. For example, Flexsteel Industries has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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