Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that JB Hi-Fi Limited (ASX:JBH) is about to go ex-dividend in just 4 days. You can purchase shares before the 22nd of August in order to receive the dividend, which the company will pay on the 6th of September.
JB Hi-Fi's next dividend payment will be AU$0.51 per share. Last year, in total, the company distributed AU$1.42 to shareholders. Last year's total dividend payments show that JB Hi-Fi has a trailing yield of 4.6% on the current share price of A$31.05. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. JB Hi-Fi paid out 65% of its earnings to investors last year, a normal payout level for most businesses. 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. Dividends consumed 65% 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 JB Hi-Fi'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. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, JB Hi-Fi's earnings per share have been growing at 11% a year for the past five years. JB Hi-Fi has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, JB Hi-Fi has increased its dividend at approximately 16% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
The Bottom Line
From a dividend perspective, should investors buy or avoid JB Hi-Fi? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. However, we'd also note that JB Hi-Fi is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
Curious what other investors think of JB Hi-Fi? See what analysts 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.