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Should Income Investors Look At Kronos Worldwide, Inc. (NYSE:KRO) Before Its Ex-Dividend?

Simply Wall St

Kronos Worldwide, Inc. (NYSE:KRO) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 2nd of December in order to be eligible for this dividend, which will be paid on the 12th of December.

Kronos Worldwide's upcoming dividend is US$0.18 a share, following on from the last 12 months, when the company distributed a total of US$0.72 per share to shareholders. Based on the last year's worth of payments, Kronos Worldwide has a trailing yield of 5.3% on the current stock price of $13.64. If you buy this business for its dividend, you should have an idea of whether Kronos Worldwide's dividend is reliable and sustainable. So we need to investigate whether Kronos Worldwide can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Kronos Worldwide

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 81% 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 worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Kronos Worldwide generated enough free cash flow to afford its dividend. Over the past year it paid out 141% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Kronos Worldwide paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Kronos Worldwide to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

NYSE:KRO Historical Dividend Yield, November 27th 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Kronos Worldwide's earnings have been skyrocketing, up 37% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past nine years, Kronos Worldwide has increased its dividend at approximately 4.1% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Kronos Worldwide is keeping back more of its profits to grow the business.

To Sum It Up

From a dividend perspective, should investors buy or avoid Kronos Worldwide? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Kronos Worldwide paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall, it's hard to get excited about Kronos Worldwide from a dividend perspective.

Curious what other investors think of Kronos Worldwide? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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 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.

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