Flowers Foods (NYSE:FLO) Is Paying Out A Larger Dividend Than Last Year

The board of Flowers Foods, Inc. (NYSE:FLO) has announced that it will be increasing its dividend by 3.1% on the 19th of June to $0.2475, up from last year's comparable payment of $0.24. This will take the dividend yield to an attractive 5.8%, providing a nice boost to shareholder returns.

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Flowers Foods' Payment Could Potentially Have Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Flowers Foods' dividend made up quite a large proportion of earnings but only 64% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Earnings per share is forecast to rise by 2.3% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 93% - on the higher side, but we wouldn't necessarily say this is unsustainable.

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Flowers Foods Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The annual payment during the last 10 years was $0.48 in 2015, and the most recent fiscal year payment was $0.96. This works out to be a compound annual growth rate (CAGR) of approximately 7.2% a year over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

Flowers Foods Might Find It Hard To Grow Its Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. We are encouraged to see that Flowers Foods has grown earnings per share at 20% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Our Thoughts On Flowers Foods' Dividend

Overall, this is a reasonable dividend, and it being raised is an added bonus. The payments look pretty sustainable with good earnings coverage and a reasonable track record. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

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. Taking the debate a bit further, we've identified 1 warning sign for Flowers Foods that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.