Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Choice Hotels International, Inc. (NYSE:CHH) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 1st of April will not receive this dividend, which will be paid on the 16th of April.
Choice Hotels International's upcoming dividend is US$0.23 a share, following on from the last 12 months, when the company distributed a total of US$0.90 per share to shareholders. Based on the last year's worth of payments, Choice Hotels International has a trailing yield of 1.3% on the current stock price of $68.08. If you buy this business for its dividend, you should have an idea of whether Choice Hotels International'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. Choice Hotels International has a low and conservative payout ratio of just 22% of its income after tax. 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. Choice Hotels International paid out more free cash flow than it generated - 128%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Choice Hotels International paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Choice Hotels International's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Choice Hotels International's earnings per share have risen 14% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Choice Hotels International has delivered an average of 2.0% per year annual increase in its dividend, based on the past ten years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
To Sum It Up
Is Choice Hotels International an attractive dividend stock, or better left on the shelf? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
On that note, you'll want to research what risks Choice Hotels International is facing. Every company has risks, and we've spotted 3 warning signs for Choice Hotels International (of which 1 is potentially serious!) you should know about.
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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