Readers hoping to buy Delek US Holdings, Inc. (NYSE:DK) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 9th of March will not receive the dividend, which will be paid on the 24th of March.
Delek US Holdings's next dividend payment will be US$0.31 per share, and in the last 12 months, the company paid a total of US$1.20 per share. Last year's total dividend payments show that Delek US Holdings has a trailing yield of 6.7% on the current share price of $18.59. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Delek US Holdings's payout ratio is modest, at just 28% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (61%) of its free cash flow in the past year, which is within an average range for most companies.
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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. 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 Delek US Holdings, with earnings per share up 3.6% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Delek US Holdings has lifted its dividend by approximately 24% a year on average. 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.
Is Delek US Holdings worth buying for its dividend? Earnings per share have been growing at a steady rate, and Delek US Holdings paid out less than half its profits and more than half its free cash flow as dividends over the last year. Overall, it's hard to get excited about Delek US Holdings from a dividend perspective.
In light of that, while Delek US Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. We've identified 4 warning signs with Delek US Holdings (at least 1 which can't be ignored), and understanding them should be part of your investment process.
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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