CBS Corporation (NYSE:CBS) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 9th of September will not receive this dividend, which will be paid on the 1st of October.
CBS's next dividend payment will be US$0.18 per share, on the back of last year when the company paid a total of US$0.72 to shareholders. Last year's total dividend payments show that CBS has a trailing yield of 1.7% on the current share price of $41.29. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. CBS is paying out just 8.8% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Dividends consumed 51% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that CBS'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.
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 CBS's earnings have been skyrocketing, up 24% per annum for 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. CBS's dividend payments per share have declined at 4.0% per year on average over the past 10 years, which is uninspiring. CBS is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
Is CBS an attractive dividend stock, or better left on the shelf? Earnings per share have grown at a nice rate in recent times and over the last year, CBS paid out less than half its earnings and a bit over half its free cash flow. CBS looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Wondering what the future holds for CBS? See what the 24 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.