The Andersons, Inc. (NASDAQ:ANDE) stock is about to trade ex-dividend in 4 days time. You can purchase shares before the 31st of March in order to receive the dividend, which the company will pay on the 22nd of April.
Andersons'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. Looking at the last 12 months of distributions, Andersons has a trailing yield of approximately 4.2% on its current stock price of $16.62. 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 check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Andersons distributed an unsustainably high 121% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Andersons generated enough free cash flow to afford its dividend. Fortunately, it paid out only 28% of its free cash flow in the past year.
It's good to see that while Andersons's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Andersons's earnings per share have plummeted approximately 32% a year over the previous five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Andersons has lifted its dividend by approximately 12% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Andersons is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
From a dividend perspective, should investors buy or avoid Andersons? It's not a great combination to see a company with earnings in decline and paying out 121% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Andersons has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Andersons. We've identified 5 warning signs with Andersons (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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. Thank you for reading.