Why You Might Be Interested In Carter's, Inc. (NYSE:CRI) For Its Upcoming Dividend

Readers hoping to buy Carter's, Inc. (NYSE:CRI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Carter's' shares before the 27th of May in order to be eligible for the dividend, which will be paid on the 10th of June.

The company's upcoming dividend is US$0.75 a share, following on from the last 12 months, when the company distributed a total of US$3.00 per share to shareholders. Last year's total dividend payments show that Carter's has a trailing yield of 4.0% on the current share price of $75.45. If you buy this business for its dividend, you should have an idea of whether Carter's's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Carter's

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Carter's paid out a comfortable 28% of its profit last year. A useful secondary check can be to evaluate whether Carter's generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (82%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Carter's, with earnings per share up 9.0% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Carter's has delivered an average of 19% per year annual increase in its dividend, based on the past nine years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Should investors buy Carter's for the upcoming dividend? Earnings per share growth has been modest, and it's interesting that Carter's is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Carter's's dividend merits.

While it's tempting to invest in Carter's for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 2 warning signs with Carter's and understanding them should be part of your investment process.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.