Treasury Wine Estates Limited (ASX:TWE) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 4th of September in order to receive the dividend, which the company will pay on the 4th of October.
Treasury Wine Estates's next dividend payment will be AU$0.20 per share, and in the last 12 months, the company paid a total of AU$0.40 per share. Calculating the last year's worth of payments shows that Treasury Wine Estates has a trailing yield of 2.1% on the current share price of A$18.74. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Treasury Wine Estates is paying out an acceptable 65% of its profit, a common payout level among most companies. 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 96% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
Treasury Wine Estates paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Treasury Wine Estates's ability to maintain its dividend.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Treasury Wine Estates's earnings have been skyrocketing, up 49% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 8 years, Treasury Wine Estates has increased its dividend at approximately 27% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Should investors buy Treasury Wine Estates for the upcoming dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Treasury Wine Estates paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, while it has some positive characteristics, we're not inclined to race out and buy Treasury Wine Estates today.
Ever wonder what the future holds for Treasury Wine Estates? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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