RCL Foods Limited (JSE:RCL) Passed Our Checks, And It's About To Pay A R00.20 Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see RCL Foods Limited (JSE:RCL) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is two business days 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase RCL Foods' shares on or after the 7th of May, you won't be eligible to receive the dividend, when it is paid on the 12th of May.

The company's next dividend payment will be R00.20 per share, and in the last 12 months, the company paid a total of R0.40 per share. Calculating the last year's worth of payments shows that RCL Foods has a trailing yield of 4.2% on the current share price of R09.50. If you buy this business for its dividend, you should have an idea of whether RCL Foods's dividend is reliable and sustainable. So we need to investigate whether RCL Foods can afford its dividend, and if the dividend could grow.

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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. RCL Foods paid out a comfortable 35% 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 16% 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.

View our latest analysis for RCL Foods

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see RCL Foods's earnings have been skyrocketing, up 45% per annum 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. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. RCL Foods has delivered an average of 7.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is RCL Foods worth buying for its dividend? 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. There's a lot to like about RCL Foods, and we would prioritise taking a closer look at it.

While it's tempting to invest in RCL Foods for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with RCL Foods and understanding them should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.