Empire Company Limited (TSE:EMP.A) stock is about to trade ex-dividend in 3 days time. Ex-dividend means that investors that purchase the stock on or after the 14th of April will not receive this dividend, which will be paid on the 30th of April.
Empire's upcoming dividend is CA$0.12 a share, following on from the last 12 months, when the company distributed a total of CA$0.48 per share to shareholders. Calculating the last year's worth of payments shows that Empire has a trailing yield of 1.6% on the current share price of CA$29.47. If you buy this business for its dividend, you should have an idea of whether Empire's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Empire paid out just 24% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. The good news is it paid out just 14% of its free cash flow in the 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.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Empire has grown its earnings rapidly, up 25% a year for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, Empire looks like a promising growth company.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Empire has delivered 6.9% dividend growth per year on average over the past ten years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Should investors buy Empire for the upcoming dividend? Empire has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about Empire, and we would prioritise taking a closer look at it.
While it's tempting to invest in Empire 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 Empire and understanding them should be part of your investment process.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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