Dividend Investors: Don't Be Too Quick To Buy Hilton Food Group plc (LON:HFG) For Its Upcoming Dividend
Hilton Food Group plc (LON:HFG) stock is about to trade ex-dividend in four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Hilton Food Group's shares before the 2nd of November to receive the dividend, which will be paid on the 1st of December.
The company's next dividend payment will be UK£0.09 per share, and in the last 12 months, the company paid a total of UK£0.32 per share. Calculating the last year's worth of payments shows that Hilton Food Group has a trailing yield of 4.9% on the current share price of £6.5. If you buy this business for its dividend, you should have an idea of whether Hilton Food Group's dividend is reliable and sustainable. As a result, readers should always check whether Hilton Food Group has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for Hilton Food Group
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Hilton Food Group paid out 257% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 65% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Hilton Food Group fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Hilton Food Group's earnings per share have dropped 18% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
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, 10 years ago, Hilton Food Group has lifted its dividend by approximately 10% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Hilton Food Group is already paying out 257% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Has Hilton Food Group got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. Additionally, Hilton Food Group is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Although, if you're still interested in Hilton Food Group and want to know more, you'll find it very useful to know what risks this stock faces. For example, Hilton Food Group has 4 warning signs (and 1 which can't be ignored) we think you should know about.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
