Don't Buy Kaiser Aluminum Corporation (NASDAQ:KALU) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Kaiser Aluminum Corporation (NASDAQ:KALU) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Kaiser Aluminum's shares on or after the 24th of April will not receive the dividend, which will be paid on the 15th of May.

The company's next dividend payment will be US$0.77 per share, and in the last 12 months, the company paid a total of US$3.08 per share. Last year's total dividend payments show that Kaiser Aluminum has a trailing yield of 3.4% on the current share price of US$90.17. If you buy this business for its dividend, you should have an idea of whether Kaiser Aluminum's dividend is reliable and sustainable. So we need to investigate whether Kaiser Aluminum can afford its dividend, and if the dividend could grow.

See our latest analysis for Kaiser Aluminum

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Kaiser Aluminum paid out 105% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 73% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Kaiser Aluminum's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Kaiser Aluminum's 12% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Kaiser Aluminum has increased its dividend at approximately 9.9% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Kaiser Aluminum is already paying out 105% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Kaiser Aluminum worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. What's more, Kaiser Aluminum is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Kaiser Aluminum.

With that in mind though, if the poor dividend characteristics of Kaiser Aluminum don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Kaiser Aluminum is showing 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

A common investing mistake is buying the first interesting stock you see. Here you can find a full 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.