It Might Not Be A Great Idea To Buy K-Bro Linen Inc. (TSE:KBL) For Its Next Dividend

·4 min read

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see K-Bro Linen Inc. (TSE:KBL) is about to trade ex-dividend in the next 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase K-Bro Linen's shares before the 30th of March in order to be eligible for the dividend, which will be paid on the 14th of April.

The company's next dividend payment will be CA$0.10 per share. Last year, in total, the company distributed CA$1.20 to shareholders. Calculating the last year's worth of payments shows that K-Bro Linen has a trailing yield of 4.4% on the current share price of CA$27.51. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for K-Bro Linen

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, K-Bro Linen paid out 327% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. 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 last year, it paid out more than three-quarters (88%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and K-Bro Linen fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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historic-dividend

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see K-Bro Linen's earnings per share have dropped 10% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. K-Bro Linen has delivered an average of 0.9% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

Has K-Bro Linen got what it takes to maintain its dividend payments? It's never fun to see a company's earnings per share in retreat. What's more, K-Bro Linen is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think K-Bro Linen is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in K-Bro Linen despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 2 warning signs for K-Bro Linen you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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