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Is It Smart To Buy Toll Brothers, Inc. (NYSE:TOL) Before It Goes Ex-Dividend?

Simply Wall St

It looks like Toll Brothers, Inc. (NYSE:TOL) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 10th of October will not receive this dividend, which will be paid on the 25th of October.

Toll Brothers's next dividend payment will be US$0.1 per share, on the back of last year when the company paid a total of US$0.4 to shareholders. Last year's total dividend payments show that Toll Brothers has a trailing yield of 1.1% on the current share price of $39.73. 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 Toll Brothers can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Toll Brothers

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Toll Brothers has a low and conservative payout ratio of just 9.2% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 10% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that Toll Brothers's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

NYSE:TOL Historical Dividend Yield, October 5th 2019

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Toll Brothers's earnings have been skyrocketing, up 36% per annum for the past five years. Toll Brothers looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Toll Brothers has delivered an average of 11% per year annual increase in its dividend, based on the past three years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is Toll Brothers worth buying for its dividend? Toll Brothers has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about Toll Brothers, and we would prioritise taking a closer look at it.

Ever wonder what the future holds for Toll Brothers? See what the 17 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.

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.

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. Thank you for reading.