Readers hoping to buy Spectrum Brands Holdings, Inc. (NYSE:SPB) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 20th of November, you won't be eligible to receive this dividend, when it is paid on the 15th of December.
Spectrum Brands Holdings's next dividend payment will be US$0.42 per share. Last year, in total, the company distributed US$1.68 to shareholders. Based on the last year's worth of payments, Spectrum Brands Holdings has a trailing yield of 2.6% on the current stock price of $65.57. 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.
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. It paid out 90% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Spectrum Brands Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 33% of its free cash flow in the past year.
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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Spectrum Brands Holdings's earnings per share have been growing at 18% a year for the past five years. It paid out more than three-quarters of its earnings in the last year, even though earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we'd wonder why management are not reinvesting more in the business.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Spectrum Brands Holdings has seen its dividend decline 46% per annum on average over the past three years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.
The Bottom Line
Is Spectrum Brands Holdings an attractive dividend stock, or better left on the shelf? We like Spectrum Brands Holdings's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. Spectrum Brands Holdings looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Spectrum Brands Holdings for the dividends alone, you should always be mindful of the risks involved. For instance, we've identified 3 warning signs for Spectrum Brands Holdings (1 doesn't sit too well with us) you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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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