Here's Why We're Wary Of Buying Culp's (NYSE:CULP) For Its Upcoming Dividend
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 Culp, Inc. (NYSE:CULP) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 8th of April in order to be eligible for this dividend, which will be paid on the 16th of April.
Culp's next dividend payment will be US$0.11 per share, on the back of last year when the company paid a total of US$0.44 to shareholders. Calculating the last year's worth of payments shows that Culp has a trailing yield of 2.8% on the current share price of $15.67. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for Culp
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Culp paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Luckily it paid out just 23% of its free cash flow last year.
Click here to see how much of its profit Culp paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Culp reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, nine years ago, Culp has lifted its dividend by approximately 16% a year on average.
Remember, you can always get a snapshot of Culp's financial health, by checking our visualisation of its financial health, here.
Final Takeaway
Is Culp worth buying for its dividend? It's hard to get used to Culp paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not that we think Culp is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Culp and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for Culp you should be aware of.
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.
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