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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Gildan Activewear Inc. (TSE:GIL) is about to go ex-dividend in just 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Accordingly, Gildan Activewear investors that purchase the stock on or after the 25th of August will not receive the dividend, which will be paid on the 20th of September.
The company's next dividend payment will be US$0.15 per share. Last year, in total, the company distributed US$0.62 to shareholders. Last year's total dividend payments show that Gildan Activewear has a trailing yield of 1.6% on the current share price of CA$48.68. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Gildan Activewear can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Gildan Activewear has a low and conservative payout ratio of just 17% of its income after tax. A useful secondary check can be to evaluate whether Gildan Activewear generated enough free cash flow to afford its dividend. Luckily it paid out just 5.1% of its free cash flow last year.
It's positive to see that Gildan Activewear'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?
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 fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Gildan Activewear earnings per share are up 5.4% per annum over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.
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, Gildan Activewear has lifted its dividend by approximately 15% 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.
Has Gildan Activewear got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Gildan Activewear is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Gildan Activewear is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Gildan Activewear, and we would prioritise taking a closer look at it.
In light of that, while Gildan Activewear has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Gildan Activewear has 2 warning signs we think you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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.
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