It looks like CSR Limited (ASX:CSR) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 8th of November, you won't be eligible to receive this dividend, when it is paid on the 10th of December.
CSR's next dividend payment will be AU$0.1 per share, on the back of last year when the company paid a total of AU$0.2 to shareholders. Based on the last year's worth of payments, CSR has a trailing yield of 4.6% on the current stock price of A$4.33. If you buy this business for its dividend, you should have an idea of whether CSR's dividend is reliable and sustainable. As a result, readers should always check whether CSR has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, CSR paid out 93% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Over the past year it paid out 133% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given CSR's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
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. With that in mind, we're encouraged by the steady growth at CSR, with earnings per share up 7.1% on average over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. CSR has seen its dividend decline 1.2% per annum on average over the past ten years, which is not great to see.
To Sum It Up
Has CSR got what it takes to maintain its dividend payments? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Bottom line: CSR has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Ever wonder what the future holds for CSR? See what the nine analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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