Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Bowl America Incorporated (NYSEMKT:BWL.A) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 22nd of July in order to be eligible for this dividend, which will be paid on the 21st of August.
Bowl America's next dividend payment will be US$0.17 per share, on the back of last year when the company paid a total of US$0.70 to shareholders. Last year's total dividend payments show that Bowl America has a trailing yield of 4.7% on the current share price of $14.8864. 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 Bowl America can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Bowl America paid out 106% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The company paid out 109% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
Bowl America does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
Cash is slightly more important than profit from a dividend perspective, but given Bowl America's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
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. For this reason, we're glad to see Bowl America's earnings per share have risen 18% per annum over the last five years.
It's not encouraging to see Bowl America paying out basically all of its earnings and cashflow to shareholders. We're glad that earnings are growing rapidly, but we're wary of the company stretching itself financially.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Bowl America has lifted its dividend by approximately 1.6% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Should investors buy Bowl America for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Bowl America intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
Keen to explore more data on Bowl America's financial performance? Check out our visualisation of its historical revenue and earnings growth.
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.
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 firstname.lastname@example.org. 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.