Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Domino's Pizza Enterprises Limited (ASX:DMP) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 25th of August in order to be eligible for this dividend, which will be paid on the 10th of September.
Domino's Pizza Enterprises's next dividend payment will be AU$0.53 per share. Last year, in total, the company distributed AU$1.19 to shareholders. Calculating the last year's worth of payments shows that Domino's Pizza Enterprises has a trailing yield of 1.4% on the current share price of A$85. 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 Domino's Pizza Enterprises can afford its dividend, and if the dividend could grow.
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. Domino's Pizza Enterprises is paying out an acceptable 74% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.
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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Domino's Pizza Enterprises's earnings per share have been growing at 17% a year for the past five years. Domino's Pizza Enterprises is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Domino's Pizza Enterprises has increased its dividend at approximately 24% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Has Domino's Pizza Enterprises got what it takes to maintain its dividend payments? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Domino's Pizza Enterprises's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 74% and 55% respectively. Overall, it's hard to get excited about Domino's Pizza Enterprises from a dividend perspective.
In light of that, while Domino's Pizza Enterprises has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 2 warning signs for Domino's Pizza Enterprises that we recommend you consider before investing in the business.
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.
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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