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Readers hoping to buy Kaiser Aluminum Corporation (NASDAQ:KALU) 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 October will not receive this dividend, which will be paid on the 13th of November.
Kaiser Aluminum's next dividend payment will be US$0.67 per share. Last year, in total, the company distributed US$2.68 to shareholders. Based on the last year's worth of payments, Kaiser Aluminum stock has a trailing yield of around 4.1% on the current share price of $65.06. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Kaiser Aluminum can afford its dividend, and if the dividend could grow.
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. Kaiser Aluminum distributed an unsustainably high 111% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 21% of its free cash flow as dividends last year, which is conservatively low.
It's good to see that while Kaiser Aluminum's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. 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 Kaiser Aluminum'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. Kaiser Aluminum has delivered an average of 11% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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. Kaiser Aluminum is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
To Sum It Up
Has Kaiser Aluminum got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 111% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think Kaiser Aluminum is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in Kaiser Aluminum despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 4 warning signs for Kaiser Aluminum that we recommend you consider before investing in the business.
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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