Kontoor Brands' (NYSE:KTB) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Kontoor Brands, Inc. (NYSE:KTB) has announced that it will be increasing its dividend by 4.2% on the 18th of December to $0.50, up from last year's comparable payment of $0.48. This will take the annual payment to 4.1% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for Kontoor Brands

Kontoor Brands' Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Kontoor Brands' dividend was only 51% of earnings, however it was paying out 183% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS is forecast to expand by 32.7%. If the dividend continues on this path, the payout ratio could be 48% by next year, which we think can be pretty sustainable going forward.

Kontoor Brands' Dividend Has Lacked Consistency

The track record isn't the longest, but we are already seeing a bit of instability in the payments. The dividend has gone from an annual total of $2.24 in 2019 to the most recent total annual payment of $1.92. This works out to be a decline of approximately 3.8% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. In the last five years, Kontoor Brands' earnings per share has shrunk at approximately 4.7% per annum. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

Kontoor Brands' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Kontoor Brands' payments are rock solid. While Kontoor Brands is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. 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 across 2 warning signs for Kontoor Brands you should be aware of, and 1 of them is a bit unpleasant. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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