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Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Kaiser Aluminum Corporation (NASDAQ:KALU) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 24th of July will not receive this dividend, which will be paid on the 15th of August.
Kaiser Aluminum’s next dividend payment will be US$0.60 per share, and in the last 12 months, the company paid a total of US$2.40 per share. Based on the last year’s worth of payments, Kaiser Aluminum has a trailing yield of 2.5% on the current stock price of $95.11. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That’s why it’s good to see Kaiser Aluminum paying out a modest 40% of its earnings. A useful secondary check can be to evaluate whether Kaiser Aluminum generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 48% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Kaiser Aluminum’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies that aren’t growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. It’s not encouraging to see that Kaiser Aluminum’s earnings are effectively flat over the past five years. We’d take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Kaiser Aluminum has lifted its dividend by approximately 9.6% a year on average.
The Bottom Line
Has Kaiser Aluminum got what it takes to maintain its dividend payments? The company has barely grown earnings per share over this time, but at least it’s paying out a decently low percentage of its earnings and cashflow as dividends. This could suggest management is reinvesting in future growth opportunities. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine strong earnings per share growth with a low payout ratio, and Kaiser Aluminum is halfway there. It’s a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for Kaiser Aluminum? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.