Investors In Calavo Growers, Inc. (NASDAQ:CVGW) Should Consider This, First

Dividend paying stocks like Calavo Growers, Inc. (NASDAQ:CVGW) tend to be popular with investors, and for good reason - some research suggests 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.

A slim 1.5% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Calavo Growers could have potential. There are a few simple ways to reduce the risks of buying Calavo Growers for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Calavo Growers!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although Calavo Growers pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

The company paid out 57% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Calavo Growers has available to meet other needs.

We update our data on Calavo Growers every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. For the purpose of this article, we only scrutinise the last decade of Calavo Growers' dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was US$0.6 in 2011, compared to US$1.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.7% a year over that time.

Companies like this, growing their dividend at a decent rate, can be very valuable over the long term, if the rate of growth can be maintained.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Calavo Growers' earnings per share have shrunk at 25% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Calavo Growers' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Calavo Growers' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. In summary, Calavo Growers has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

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. For example, we've picked out 2 warning signs for Calavo Growers that investors should know about before committing capital to this stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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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