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It Might Not Be A Great Idea To Buy Big 5 Sporting Goods Corporation (NASDAQ:BGFV) For Its Next Dividend

Simply Wall St

Big 5 Sporting Goods Corporation (NASDAQ:BGFV) stock is about to trade ex-dividend in 4 days time. You can purchase shares before the 27th of November in order to receive the dividend, which the company will pay on the 13th of December.

Big 5 Sporting Goods's next dividend payment will be US$0.05 per share, and in the last 12 months, the company paid a total of US$0.20 per share. Last year's total dividend payments show that Big 5 Sporting Goods has a trailing yield of 7.9% on the current share price of $2.53. If you buy this business for its dividend, you should have an idea of whether Big 5 Sporting Goods's dividend is reliable and sustainable. As a result, readers should always check whether Big 5 Sporting Goods has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Big 5 Sporting Goods

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Big 5 Sporting Goods distributed an unsustainably high 140% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 13% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Big 5 Sporting Goods's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Big 5 Sporting Goods paid out over the last 12 months.

NasdaqGS:BGFV Historical Dividend Yield, November 22nd 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Big 5 Sporting Goods's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 36% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Big 5 Sporting Goods's dividend payments are broadly unchanged compared to where they were ten years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

The Bottom Line

Should investors buy Big 5 Sporting Goods for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 140% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Big 5 Sporting Goods's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Big 5 Sporting Goods has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Want to learn more about Big 5 Sporting Goods? Here's a visualisation of its historical rate of revenue and earnings growth.

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.

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.