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Here's Why We're Wary Of Buying Bed Bath & Beyond Inc.'s (NASDAQ:BBBY) For Its Upcoming Dividend

Simply Wall St

Bed Bath & Beyond Inc. (NASDAQ:BBBY) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 12th of September, you won't be eligible to receive this dividend, when it is paid on the 15th of October.

Bed Bath & Beyond's next dividend payment will be US$0.17 per share. Last year, in total, the company distributed US$0.68 to shareholders. Last year's total dividend payments show that Bed Bath & Beyond has a trailing yield of 6.6% on the current share price of $10.35. 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! So we need to investigate whether Bed Bath & Beyond can afford its dividend, and if the dividend could grow.

View our latest analysis for Bed Bath & Beyond

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. Bed Bath & Beyond's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. 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. The good news is it paid out just 19% of its free cash flow in the last year.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:BBBY Historical Dividend Yield, September 8th 2019

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. Bed Bath & Beyond was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last 5 years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Bed Bath & Beyond has delivered 11% dividend growth per year on average over the past 3 years.

Remember, you can always get a snapshot of Bed Bath & Beyond's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Is Bed Bath & Beyond an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow. It's not that we think Bed Bath & Beyond is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Ever wonder what the future holds for Bed Bath & Beyond? See what the 19 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.