Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Foot Locker, Inc. (NYSE:FL) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 16th of January will not receive this dividend, which will be paid on the 31st of January.
Foot Locker's upcoming dividend is US$0.38 a share, following on from the last 12 months, when the company distributed a total of US$1.52 per share to shareholders. Calculating the last year's worth of payments shows that Foot Locker has a trailing yield of 3.9% on the current share price of $39.1. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see Foot Locker paying out a modest 32% of its earnings. 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 distributed 27% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Foot Locker'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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Foot Locker earnings per share are up 10.0% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Foot Locker has lifted its dividend by approximately 9.7% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
From a dividend perspective, should investors buy or avoid Foot Locker? Earnings per share growth has been growing somewhat, and Foot Locker is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Foot Locker is being conservative with its dividend payouts and could still perform reasonably over the long run. It's a promising combination that should mark this company worthy of closer attention.
Curious what other investors think of Foot Locker? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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 firstname.lastname@example.org. 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.
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