It Might Not Be A Great Idea To Buy The Becker Milk Company Limited (TSE:BEK.B) For Its Next Dividend
Readers hoping to buy The Becker Milk Company Limited (TSE:BEK.B) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 22nd of March will not receive this dividend, which will be paid on the 31st of March.
Becker Milk's upcoming dividend is CA$0.40 a share, following on from the last 12 months, when the company distributed a total of CA$0.80 per share to shareholders. Looking at the last 12 months of distributions, Becker Milk has a trailing yield of approximately 5.7% on its current stock price of CA$14. If you buy this business for its dividend, you should have an idea of whether Becker Milk's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for Becker Milk
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Becker Milk distributed an unsustainably high 200% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. It paid out an unsustainably high 297% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Becker Milk is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
Cash is slightly more important than profit from a dividend perspective, but given Becker Milk's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see how much of its profit Becker Milk paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Becker Milk's earnings per share have dropped 17% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Becker Milk has lifted its dividend by approximately 2.9% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Becker Milk is already paying out 200% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Final Takeaway
Has Becker Milk got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Becker Milk is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
With that being said, if you're still considering Becker Milk as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Becker Milk is showing 5 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
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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