It looks like Ingles Markets, Incorporated (NASDAQ:IMKT.A) is about to go ex-dividend in the next 3 days. If you purchase the stock on or after the 9th of October, you won't be eligible to receive this dividend, when it is paid on the 17th of October.
Ingles Markets's next dividend payment will be US$0.2 per share, on the back of last year when the company paid a total of US$0.7 to shareholders. Calculating the last year's worth of payments shows that Ingles Markets has a trailing yield of 1.7% on the current share price of $38.93. If you buy this business for its dividend, you should have an idea of whether Ingles Markets's dividend is reliable and sustainable. So we need to investigate whether Ingles Markets can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Ingles Markets is paying out just 17% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Ingles Markets generated enough free cash flow to afford its dividend. Fortunately, it paid out only 29% of its free cash flow in the past year.
It's positive to see that Ingles Markets'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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Ingles Markets has grown its earnings rapidly, up 35% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Ingles Markets's dividend payments are effectively flat on where they were ten years ago.
To Sum It Up
Is Ingles Markets worth buying for its dividend? Ingles Markets has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. It's a promising combination that should mark this company worthy of closer attention.
Want to learn more about Ingles Markets? Here's a visualisation of its historical rate of revenue and earnings growth.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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