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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Flowers Foods, Inc. (NYSE:FLO) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Flowers Foods investors that purchase the stock on or after the 2nd of December will not receive the dividend, which will be paid on the 17th of December.
The company's next dividend payment will be US$0.21 per share, and in the last 12 months, the company paid a total of US$0.84 per share. Calculating the last year's worth of payments shows that Flowers Foods has a trailing yield of 3.2% on the current share price of $26.46. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's 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. Its dividend payout ratio is 78% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 62% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Flowers Foods's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. With that in mind, we're encouraged by the steady growth at Flowers Foods, with earnings per share up 3.3% on average over the last five years. A high payout ratio of 78% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, Flowers Foods could be signalling that its future growth prospects are thin.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Flowers Foods has delivered an average of 9.0% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has Flowers Foods got what it takes to maintain its dividend payments? Earnings per share have been growing modestly and Flowers Foods paid out a bit over half of its earnings and free cash flow last year. To summarise, Flowers Foods looks okay on this analysis, although it doesn't appear a stand-out opportunity.
With that being said, if dividends aren't your biggest concern with Flowers Foods, you should know about the other risks facing this business. For example, we've found 1 warning sign for Flowers Foods that we recommend you consider before investing in the business.
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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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