Should Kansas City Southern (NYSE:KSU) Be Part Of Your Dividend Portfolio?

Is Kansas City Southern (NYSE:KSU) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With a 1.2% yield and a seven-year payment history, investors probably think Kansas City Southern looks like a reliable dividend stock. A 1.2% yield is not inspiring, but the longer payment history has some appeal. It also bought back stock during the year, equivalent to approximately 2.0% of the company’s market capitalisation at the time. There are a few simple ways to reduce the risks of buying Kansas City Southern for its dividend, and we’ll go through these below.

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NYSE:KSU Historical Dividend Yield, April 15th 2019
NYSE:KSU Historical Dividend Yield, April 15th 2019

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Kansas City Southern paid out 23% of its profit as dividends, over the trailing twelve month period. We’d say its dividends are thoroughly covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Kansas City Southern paid out a conservative 45% of its free cash flow as dividends last year.

Consider getting our latest analysis on Kansas City Southern’s financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Kansas City Southern has been paying a dividend for the past seven years. The dividend has been quite stable over the past seven years, which is great to see – although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past seven-year period, the first annual payment was US$0.78 in 2012, compared to US$1.44 last year. Dividends per share have grown at approximately 9.2% per year over this time.

Kansas City Southern has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Kansas City Southern has grown its earnings per share at 14% per annum over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.

Conclusion

To summarise, shareholders should always check that Kansas City Southern’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Kansas City Southern has low and conservative payout ratios. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Kansas City Southern performs well under this analysis, although it falls slightly short in some key areas. At the right valuation though, it may still be an interesting prospect.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 17 analysts we track are forecasting for Kansas City Southern for free with public analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.