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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 Baby Bunting Group Limited (ASX:BBN) is about to go ex-dividend in just four days. You will need to purchase shares before the 25th of February to receive the dividend, which will be paid on the 12th of March.
Baby Bunting Group's next dividend payment will be AU$0.058 per share. Last year, in total, the company distributed AU$0.12 to shareholders. Based on the last year's worth of payments, Baby Bunting Group has a trailing yield of 2.1% on the current stock price of A$5.74. 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 investigate whether Baby Bunting Group 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. Baby Bunting Group paid out 123% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Thankfully its dividend payments took up just 46% of the free cash flow it generated, which is a comfortable payout ratio.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Baby Bunting Group fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Baby Bunting Group, with earnings per share up 9.7% on average over the last five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Baby Bunting Group has delivered an average of 14% per year annual increase in its dividend, based on the past five years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Is Baby Bunting Group worth buying for its dividend? Baby Bunting Group has been steadily growing its earnings per share, and it is paying out just 46% of its cash flow but an uncomfortably high 123% of its income. In summary, it's hard to get excited about Baby Bunting Group from a dividend perspective.
So if you want to do more digging on Baby Bunting Group, you'll find it worthwhile knowing the risks that this stock faces. Case in point: We've spotted 3 warning signs for Baby Bunting Group you should be aware of.
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.
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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