Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Coca-Cola Amatil Limited (ASX:CCL) is about to go ex-dividend in just 2 days. You will need to purchase shares before the 27th of August to receive the dividend, which will be paid on the 9th of October.
Coca-Cola Amatil's upcoming dividend is AU$0.25 a share, following on from the last 12 months, when the company distributed a total of AU$0.51 per share to shareholders. Looking at the last 12 months of distributions, Coca-Cola Amatil has a trailing yield of approximately 4.7% on its current stock price of A$10.78. If you buy this business for its dividend, you should have an idea of whether Coca-Cola Amatil's dividend is reliable and sustainable. As a result, readers should always check whether Coca-Cola Amatil has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 85% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether Coca-Cola Amatil generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (82%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
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.
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. 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 encouraging to see Coca-Cola Amatil has grown its earnings rapidly, up 40% a year for the past five years. Earnings per share are growing at a rapid rate, yet the company is paying out more than three-quarters of its earnings.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Coca-Cola Amatil has increased its dividend at approximately 2.7% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Has Coca-Cola Amatil got what it takes to maintain its dividend payments? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. However, we'd also note that Coca-Cola Amatil is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. In summary, while it has some positive characteristics, we're not inclined to race out and buy Coca-Cola Amatil today.
Wondering what the future holds for Coca-Cola Amatil? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.