U.S. markets open in 5 hours 17 minutes

Dividend Investors: Don't Be Too Quick To Buy The Cato Corporation (NYSE:CATO) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy The Cato Corporation (NYSE:CATO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 13th of September in order to be eligible for this dividend, which will be paid on the 30th of September.

Cato's next dividend payment will be US$0.33 per share. Last year, in total, the company distributed US$1.32 to shareholders. Last year's total dividend payments show that Cato has a trailing yield of 8.0% on the current share price of $16.46. If you buy this business for its dividend, you should have an idea of whether Cato's dividend is reliable and sustainable. So we need to investigate whether Cato can afford its dividend, and if the dividend could grow.

View our latest analysis for Cato

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Cato paid out 97% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Dividends consumed 73% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Cato's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see how much of its profit Cato paid out over the last 12 months.

NYSE:CATO Historical Dividend Yield, September 9th 2019

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. With that in mind, we're discomforted by Cato's 6.0% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Cato has lifted its dividend by approximately 7.2% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Cato is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Has Cato got what it takes to maintain its dividend payments? It's never fun to see a company's earnings per share in retreat. What's more, Cato is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think Cato is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Keen to explore more data on Cato's financial performance? Check out our visualisation of its historical revenue and earnings growth.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.