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Here's How We Evaluate JB Hi-Fi Limited's (ASX:JBH) Dividend

Simply Wall St

Today we'll take a closer look at JB Hi-Fi Limited (ASX:JBH) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, JB Hi-Fi likely looks attractive to investors, given its 4.1% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Remember though, due to the recent spike in its share price, JB Hi-Fi's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple research can reduce the risk of buying JB Hi-Fi for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on JB Hi-Fi!

ASX:JBH Historical Dividend Yield, September 29th 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. JB Hi-Fi paid out 65% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 65% of its free cash flow, which is not bad per se, but does start to limit the amount of cash JB Hi-Fi has available to meet other needs. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Remember, you can always get a snapshot of JB Hi-Fi's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of JB Hi-Fi's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was AU$0.44 in 2009, compared to AU$1.42 last year. Dividends per share have grown at approximately 12% per year over this time. JB Hi-Fi's dividend payments have fluctuated, so it hasn't grown 12% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see JB Hi-Fi has grown its earnings per share at 11% per annum over the past five years. JB Hi-Fi's earnings per share have grown rapidly in recent years, although more than half of its profits are being paid out as dividends, which makes us wonder if the company has a limited number of reinvestment opportunities in its business.

Conclusion

To summarise, shareholders should always check that JB Hi-Fi's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. JB Hi-Fi's is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than JB Hi-Fi out there.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 12 JB Hi-Fi analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.