Readers hoping to buy KB Home (NYSE:KBH) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 5th of February to receive the dividend, which will be paid on the 20th of February.
KB Home's next dividend payment will be US$0.09 per share. Last year, in total, the company distributed US$0.36 to shareholders. Calculating the last year's worth of payments shows that KB Home has a trailing yield of 1.0% on the current share price of $37.55. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's 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. KB Home has a low and conservative payout ratio of just 7.6% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Luckily it paid out just 9.7% 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.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. KB Home's earnings per share have fallen at approximately 22% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, KB Home has lifted its dividend by approximately 3.7% a year on average.
To Sum It Up
Should investors buy KB Home for the upcoming dividend? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. Overall, it's hard to get excited about KB Home from a dividend perspective.
Curious what other investors think of KB Home? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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.
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