Here's Why We're Wary Of Buying Kenvue's (NYSE:KVUE) For Its Upcoming Dividend

Readers hoping to buy Kenvue Inc. (NYSE:KVUE) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Kenvue's shares before the 13th of August in order to be eligible for the dividend, which will be paid on the 27th of August.

The company's next dividend payment will be US$0.2075 per share. Last year, in total, the company distributed US$0.82 to shareholders. Calculating the last year's worth of payments shows that Kenvue has a trailing yield of 3.8% on the current share price of US$21.34. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Kenvue paid out 111% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. The company paid out 107% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given Kenvue's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

See our latest analysis for Kenvue

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Kenvue's 15% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Kenvue has delivered an average of 1.2% per year annual increase in its dividend, based on the past two years of dividend payments.

The Bottom Line

Has Kenvue got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Kenvue is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Kenvue.

With that in mind though, if the poor dividend characteristics of Kenvue don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 2 warning signs we've spotted with Kenvue (including 1 which can't be ignored).

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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.