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Don't Race Out To Buy K-Bro Linen Inc. (TSE:KBL) Just Because It's Going Ex-Dividend

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Simply Wall St
·3 min read
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It looks like K-Bro Linen Inc. (TSE:KBL) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 28th of January will not receive the dividend, which will be paid on the 12th of February.

K-Bro Linen's next dividend payment will be CA$0.10 per share. Last year, in total, the company distributed CA$1.20 to shareholders. Calculating the last year's worth of payments shows that K-Bro Linen has a trailing yield of 3.2% on the current share price of CA$37.16. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for K-Bro Linen

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. K-Bro Linen paid out a disturbingly high 329% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether K-Bro Linen generated enough free cash flow to afford its dividend. Over the last year it paid out 58% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while K-Bro Linen's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. K-Bro Linen's earnings per share have fallen at approximately 27% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, K-Bro Linen has lifted its dividend by approximately 0.9% a year on average.

Final Takeaway

Should investors buy K-Bro Linen for the upcoming dividend? Earnings per share have been shrinking in recent times. Additionally, K-Bro Linen 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. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of K-Bro Linen.

With that being said, if you're still considering K-Bro Linen as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 4 warning signs for K-Bro Linen (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.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.