Should Income Investors Look At Collins Foods Limited (ASX:CKF) Before Its Ex-Dividend?
Collins Foods Limited (ASX:CKF) stock is about to trade ex-dividend in two days. Investors can purchase shares before the 7th of December in order to be eligible for this dividend, which will be paid on the 18th of December.
Collins Foods's next dividend payment will be AU$0.10 per share, and in the last 12 months, the company paid a total of AU$0.20 per share. Calculating the last year's worth of payments shows that Collins Foods has a trailing yield of 1.9% on the current share price of A$10.43. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
View our latest analysis for Collins Foods
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 89% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether Collins Foods generated enough free cash flow to afford its dividend. Luckily it paid out just 19% of its free cash flow last year.
It's positive to see that Collins 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 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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're not enthused to see that Collins Foods's earnings per share have remained 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past eight years, Collins Foods has increased its dividend at approximately 15% a year on average.
The Bottom Line
From a dividend perspective, should investors buy or avoid Collins Foods? The payout ratios appear reasonably conservative, which implies the dividend may be somewhat sustainable. Still, with earnings basically flat, Collins Foods doesn't stand out from a dividend perspective. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
With that being said, if dividends aren't your biggest concern with Collins Foods, you should know about the other risks facing this business. For example, Collins Foods has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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