The board of Educational Development Corporation (NASDAQ:EDUC) has announced that it will pay a dividend of US$0.10 per share on the 9th of December. This makes the dividend yield 4.1%, which will augment investor returns quite nicely.
Educational Development's Dividend Is Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Educational Development's earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Looking forward, earnings per share could rise by 39.6% over the next year if the trend from the last few years continues. If the dividend continues along recent trends, we estimate the payout ratio will be 24%, which is in the range that makes us comfortable with the sustainability of the dividend.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2011, the first annual payment was US$0.30, compared to the most recent full-year payment of US$0.40. This works out to be a compound annual growth rate (CAGR) of approximately 2.9% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
The Dividend Looks Likely To Grow
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's encouraging to see Educational Development has been growing its earnings per share at 40% a year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Educational Development's payments, as there could be some issues with sustaining them into the future. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 6 warning signs for Educational Development you should be aware of, and 2 of them are a bit concerning. We have also put together a list of global stocks with a solid dividend.
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.
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