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Readers hoping to buy Citi Trends, Inc. (NASDAQ:CTRN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 2nd of March, you won't be eligible to receive this dividend, when it is paid on the 17th of March.
Citi Trends's next dividend payment will be US$0.08 per share, on the back of last year when the company paid a total of US$0.32 to shareholders. Looking at the last 12 months of distributions, Citi Trends has a trailing yield of approximately 1.5% on its current stock price of $21.63. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Citi Trends's payout ratio is modest, at just 27% of profit. 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 20% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Citi Trends'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 fall far enough, the company could be forced to cut its dividend. It's encouraging to see Citi Trends has grown its earnings rapidly, up 107% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Citi Trends has delivered 5.9% dividend growth per year on average over the past five years. Earnings per share have been growing much quicker than dividends, potentially because Citi Trends is keeping back more of its profits to grow the business.
The Bottom Line
From a dividend perspective, should investors buy or avoid Citi Trends? We love that Citi Trends is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Overall we think this is an attractive combination and worthy of further research.
Keen to explore more data on Citi Trends's financial performance? Check out our visualisation of its historical revenue and earnings growth.
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.
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.
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. Thank you for reading.