Coca-Cola Amatil Limited (ASX:CCL) stock is about to trade ex-dividend in 2 days time. Investors can purchase shares before the 25th of February in order to be eligible for this dividend, which will be paid on the 15th of April.
Coca-Cola Amatil's next dividend payment will be AU$0.26 per share. Last year, in total, the company distributed AU$0.47 to shareholders. Calculating the last year's worth of payments shows that Coca-Cola Amatil has a trailing yield of 3.6% on the current share price of A$12.88. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Coca-Cola Amatil paid out 92% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 79% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's good to see that while Coca-Cola Amatil's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
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. With that in mind, we're encouraged by the steady growth at Coca-Cola Amatil, with earnings per share up 7.4% on average over the last five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Coca-Cola Amatil has increased its dividend at approximately 0.8% a year on average.
The Bottom Line
Is Coca-Cola Amatil worth buying for its dividend? While earnings per share have been growing slowly, Coca-Cola Amatil is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. Bottom line: Coca-Cola Amatil has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Ever wonder what the future holds for Coca-Cola Amatil? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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