It looks like National CineMedia, Inc. (NASDAQ:NCMI) is about to go ex-dividend in the next 4 days. You can purchase shares before the 13th of November in order to receive the dividend, which the company will pay on the 29th of November.
National CineMedia's next dividend payment will be US$0.2 per share. Last year, in total, the company distributed US$0.7 to shareholders. Based on the last year's worth of payments, National CineMedia has a trailing yield of 9.0% on the current stock price of $7.58. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. National CineMedia distributed an unsustainably high 158% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 42% of the free cash flow it generated, which is a comfortable payout ratio.
It's good to see that while National CineMedia's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see National CineMedia's earnings per share have dropped 10% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. National CineMedia has delivered an average of 0.6% per year annual increase in its dividend, based on the past ten years of dividend payments.
Should investors buy National CineMedia for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 158% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think National CineMedia is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Ever wonder what the future holds for National CineMedia? See what the six analysts we track 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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