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 23rd of January will not receive this dividend, which will be paid on the 14th of February.
Kaiser Aluminum’s next dividend payment will be US$0.67 per share. Last year, in total, the company distributed US$2.40 to shareholders. Looking at the last 12 months of distributions, Kaiser Aluminum has a trailing yield of approximately 2.6% on its current stock price of $104.94. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Kaiser Aluminum paid out a comfortable 40% of its profit last year. A useful secondary check can be to evaluate whether Kaiser Aluminum generated enough free cash flow to afford its dividend. Fortunately, it paid out only 30% 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?
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we’re not overly excited about Kaiser Aluminum’s flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Recent growth has not been impressive. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Kaiser Aluminum has delivered 11% dividend growth per year on average over the past ten years.
The Bottom Line
Has Kaiser Aluminum got what it takes to maintain its dividend payments? Earnings per share have been flat over this time, but we’re intrigued to see that Kaiser Aluminum is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. 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. Overall we think this is an attractive combination and worthy of further research.
Wondering 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
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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