Why It Might Not Make Sense To Buy Kronos Worldwide, Inc. (NYSE:KRO) For Its Upcoming Dividend

Kronos Worldwide, Inc. (NYSE:KRO) stock is about to trade ex-dividend in four days. This means that investors who purchase shares on or after the 8th of March will not receive the dividend, which will be paid on the 18th of March.

Kronos Worldwide's next dividend payment will be US$0.18 per share. Last year, in total, the company distributed US$0.72 to shareholders. Looking at the last 12 months of distributions, Kronos Worldwide has a trailing yield of approximately 4.8% on its current stock price of $14.94. 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! So we need to investigate whether Kronos Worldwide can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Kronos Worldwide

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Kronos Worldwide paid out 132% 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. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 249% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Kronos Worldwide intends to continue funding this dividend, or if it could be forced to cut the payment.

As Kronos Worldwide's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Kronos Worldwide paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Kronos Worldwide's earnings per share have fallen at approximately 8.6% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Kronos Worldwide has lifted its dividend by approximately 3.7% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Kronos Worldwide is already paying out 132% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is Kronos Worldwide an attractive dividend stock, or better left on the shelf? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (132%) and cash flow 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. It's not that we think Kronos Worldwide is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Kronos Worldwide and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 3 warning signs with Kronos Worldwide (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

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.

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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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