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Kip McGrath Education Centres Limited (ASX:KME) Pays A 2.5% In Just 4

Simply Wall St

It looks like Kip McGrath Education Centres Limited (ASX:KME) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 2nd of September, you won't be eligible to receive this dividend, when it is paid on the 17th of September.

Kip McGrath Education Centres's next dividend payment will be AU$0.025 per share, on the back of last year when the company paid a total of AU$0.04 to shareholders. Looking at the last 12 months of distributions, Kip McGrath Education Centres has a trailing yield of approximately 3.9% on its current stock price of A$1.02. 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 Kip McGrath Education Centres can afford its dividend, and if the dividend could grow.

View our latest analysis for Kip McGrath Education Centres

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Kip McGrath Education Centres is paying out an acceptable 68% of its profit, a common payout level among most companies. 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. Over the last year it paid out 56% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Kip McGrath Education Centres'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.

Click here to see how much of its profit Kip McGrath Education Centres paid out over the last 12 months.

ASX:KME Historical Dividend Yield, August 28th 2019

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Kip McGrath Education Centres's earnings have been skyrocketing, up 28% per annum for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Kip McGrath Education Centres has delivered 7.2% dividend growth per year on average over the past 10 years. 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

Is Kip McGrath Education Centres an attractive dividend stock, or better left on the shelf? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. However, we'd also note that Kip McGrath Education Centres 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, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

Want to learn more about Kip McGrath Education Centres's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.