Tread With Caution Around Sanderson Farms, Inc.'s (NASDAQ:SAFM) 1.4% Dividend Yield

By
Simply Wall St
Published
October 13, 2020
NasdaqGS:SAFM
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Dividend paying stocks like Sanderson Farms, Inc. (NASDAQ:SAFM) 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 1.4% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Sanderson Farms could have potential. There are a few simple ways to reduce the risks of buying Sanderson Farms for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Sanderson Farms!

historic-dividend
NasdaqGS:SAFM Historic Dividend October 13th 2020

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While Sanderson Farms pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Last year, Sanderson Farms paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

Consider getting our latest analysis on Sanderson Farms' financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Sanderson Farms' dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was US$0.6 in 2010, compared to US$1.8 last year. Dividends per share have grown at approximately 11% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Sanderson Farms' EPS have declined at around 34% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Sanderson Farms' dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share are down, and Sanderson Farms' dividend has been cut at least once in the past, which is disappointing. Using these criteria, Sanderson Farms looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Sanderson Farms that investors should take into consideration.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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