Be Sure To Check Out RCL Foods Limited (JSE:RCL) Before It Goes Ex-Dividend

Readers hoping to buy RCL Foods Limited (JSE:RCL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, RCL Foods investors that purchase the stock on or after the 16th of October will not receive the dividend, which will be paid on the 21st of October.

The company's upcoming dividend is R00.35 a share, following on from the last 12 months, when the company distributed a total of R0.35 per share to shareholders. Looking at the last 12 months of distributions, RCL Foods has a trailing yield of approximately 3.8% on its current stock price of R09.30. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for RCL Foods

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. RCL Foods paid out a comfortable 26% of its profit last year. A useful secondary check can be to evaluate whether RCL Foods generated enough free cash flow to afford its dividend. The good news is it paid out just 0.1% of its free cash flow in the last year.

It's positive to see that RCL Foods'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.

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

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. It's encouraging to see RCL Foods has grown its earnings rapidly, up 48% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, RCL Foods has lifted its dividend by approximately 5.8% a year on average. Earnings per share have been growing much quicker than dividends, potentially because RCL Foods is keeping back more of its profits to grow the business.

Final Takeaway

From a dividend perspective, should investors buy or avoid RCL Foods? RCL Foods has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while RCL Foods has an appealing dividend, it's worth knowing the risks involved with this stock. For example - RCL Foods has 1 warning sign we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.