Should You Buy RFG Holdings Limited (JSE:RFG) For Its Upcoming Dividend?

RFG Holdings Limited (JSE:RFG) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 20th of January will not receive this dividend, which will be paid on the 25th of January.

RFG Holdings's upcoming dividend is R0.29 a share, following on from the last 12 months, when the company distributed a total of R0.29 per share to shareholders. Looking at the last 12 months of distributions, RFG Holdings has a trailing yield of approximately 2.3% on its current stock price of ZAR12.4. If you buy this business for its dividend, you should have an idea of whether RFG Holdings's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for RFG Holdings

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. That's why it's good to see RFG Holdings paying out a modest 35% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Luckily it paid out just 22% of its free cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that RFG Holdings's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. RFG Holdings has delivered 3.0% dividend growth per year on average over the past five years.

The Bottom Line

Is RFG Holdings an attractive dividend stock, or better left on the shelf? Earnings per share have been flat over this time, but we're intrigued to see that RFG Holdings 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. Generally we like to see both low payout ratios and strong earnings per share growth, but RFG Holdings is halfway there. RFG Holdings looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

Curious what other investors think of RFG Holdings? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

If you're in the market for dividend stocks, we recommend checking our list of top 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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