Brown-Forman Corporation (NYSE:BF.B) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 6th of March will not receive this dividend, which will be paid on the 1st of April.
Brown-Forman's next dividend payment will be US$0.17 per share, and in the last 12 months, the company paid a total of US$0.70 per share. Based on the last year's worth of payments, Brown-Forman stock has a trailing yield of around 1.1% on the current share price of $61.41. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Brown-Forman has been able to grow its dividends, or if the dividend might be cut.
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. Fortunately Brown-Forman's payout ratio is modest, at just 37% of profit. 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. Over the last year it paid out 53% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Brown-Forman'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.
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. This is why it's a relief to see Brown-Forman earnings per share are up 7.7% per annum over the last five years. Decent historical earnings per share growth suggests Brown-Forman has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
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, Brown-Forman has lifted its dividend by approximately 8.6% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Has Brown-Forman got what it takes to maintain its dividend payments? Earnings per share have been growing at a steady rate, and Brown-Forman paid out less than half its profits and more than half its free cash flow as dividends over the last year. To summarise, Brown-Forman looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Wondering what the future holds for Brown-Forman? See what the 13 analysts we track 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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