What To Know Before Buying Core-Mark Holding Company, Inc. (NASDAQ:CORE) For Its Dividend
Is Core-Mark Holding Company, Inc. (NASDAQ:CORE) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
Investors might not know much about Core-Mark Holding Company's dividend prospects, even though it has been paying dividends for the last eight years and offers a 2.0% yield. While the yield may not look too great, the relatively long payment history is interesting. The company also bought back stock equivalent to around 1.2% of market capitalisation this year. There are a few simple ways to reduce the risks of buying Core-Mark Holding Company for its dividend, and we'll go through these below.
Click the interactive chart for our full dividend analysis
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Core-Mark Holding Company paid out 38% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, Core-Mark Holding Company paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
Is Core-Mark Holding Company's Balance Sheet Risky?
As Core-Mark Holding Company has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Core-Mark Holding Company is carrying net debt of 3.39 times its EBITDA, which is getting towards the upper limit of our comfort range on a dividend stock that the investor hopes will endure a wide range of economic circumstances.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Core-Mark Holding Company has EBIT of 6.31 times its interest expense, which we think is adequate.
Consider getting our latest analysis on Core-Mark Holding Company's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The first recorded dividend for Core-Mark Holding Company, in the last decade, was eight years ago. The company has been paying a stable dividend for a while now, which is great. However we'd prefer to see consistency for a few more years before giving it our full seal of approval. During the past eight-year period, the first annual payment was US$0.68 in 2012, compared to US$0.48 last year. This works out to be a decline of approximately 4.3% per year over that time.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Core-Mark Holding Company has grown its earnings per share at 5.3% per annum over the past five years. Earnings per share have been growing at a credible rate. What's more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, the company has a conservative payout ratio, although we'd note that its cashflow in the past year was substantially lower than its reported profit. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we'd like. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Core-Mark Holding Company out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 Core-Mark Holding Company analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
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. Thank you for reading.
