Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see H&R Block, Inc. (NYSE:HRB) is about to trade ex-dividend in the next four days. You will need to purchase shares before the 15th of March to receive the dividend, which will be paid on the 1st of April.
H&R Block's next dividend payment will be US$0.26 per share, and in the last 12 months, the company paid a total of US$1.04 per share. Last year's total dividend payments show that H&R Block has a trailing yield of 5.3% on the current share price of $19.76. If you buy this business for its dividend, you should have an idea of whether H&R Block's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
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. H&R Block paid out 97% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 42% of the free cash flow it generated, which is a comfortable payout ratio.
It's good to see that while H&R Block's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see H&R Block's earnings per share have dropped 9.5% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. H&R Block has delivered 5.7% dividend growth per year on average over the past 10 years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. H&R Block is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Has H&R Block got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 97% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in H&R Block's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
So if you're still interested in H&R Block despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To that end, you should learn about the 6 warning signs we've spotted with H&R Block (including 1 which doesn't sit too well with us).
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. 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.
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