Dividend paying stocks like Dunkin’ Brands Group, Inc. (NASDAQ:DNKN) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With a 2.0% yield and a seven-year payment history, investors probably think Dunkin’ Brands Group looks like a reliable dividend stock. A 2.0% yield is not inspiring, but the longer payment history has some appeal. It also bought back stock during the year, equivalent to approximately 9.3% of the company’s market capitalisation at the time. 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.Click the interactive chart for our full dividend analysis
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 be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Dunkin’ Brands Group paid out 51% of its profit as dividends. 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.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Dunkin’ Brands Group paid out 53% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business.
Is Dunkin’ Brands Group’s Balance Sheet Risky?As Dunkin’ Brands Group has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.
A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). Dunkin’ Brands Group has net debt of 5.71 times its earnings before interest, tax, depreciation and amortisation (EBITDA) which implies meaningful risk if interest rates rise of earnings decline.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. With EBIT of 3.28 times its interest expense, Dunkin’ Brands Group’s interest cover is starting to look a bit thin. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company’s dividend while these metrics persist.
Remember, you can always get a snapshot of Dunkin’ Brands Group’s latest financial position, by checking our visualisation of its financial health.
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. Dunkin’ Brands Group has been paying a dividend for the past seven years. Its dividend has not fluctuated much that time, which we like, but we’re conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past seven-year period, the first annual payment was US$0.60 in 2012, compared to US$1.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Dunkin’ Brands Group has grown its earnings per share at 15% per annum over the past five years. Dunkin’ Brands Group’s earnings per share have grown rapidly in recent years, although more than half of its profits are being paid out as dividends, which makes us wonder if the company has a limited number of reinvestment opportunities in its business.
To summarise, shareholders should always check that Dunkin’ Brands Group’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Dunkin’ Brands Group is paying out an acceptable percentage of its cashflow and profit. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Dunkin’ Brands Group out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 22 Dunkin’ Brands Group analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.