Kansas City Southern (NYSE:KSU) stock is about to trade ex-dividend in four days. You can purchase shares before the 5th of March in order to receive the dividend, which the company will pay on the 7th of April.
Kansas City Southern's upcoming dividend is US$0.54 a share, following on from the last 12 months, when the company distributed a total of US$2.16 per share to shareholders. Based on the last year's worth of payments, Kansas City Southern has a trailing yield of 1.0% on the current stock price of $212.34. If you buy this business for its dividend, you should have an idea of whether Kansas City Southern's dividend is reliable and sustainable. As a result, readers should always check whether Kansas City Southern has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Kansas City Southern paid out just 25% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Kansas City Southern generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 26% of the free cash flow it generated, which is a comfortable payout ratio.
It's positive to see that Kansas City Southern'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 with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Kansas City Southern earnings per share are up 8.3% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last nine years, Kansas City Southern has lifted its dividend by approximately 12% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has Kansas City Southern got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Kansas City Southern 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. It might be nice to see earnings growing faster, but Kansas City Southern is being conservative with its dividend payouts and could still perform reasonably over the long run. It's a promising combination that should mark this company worthy of closer attention.
While it's tempting to invest in Kansas City Southern for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for Kansas City Southern you should be aware of.
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.
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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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