Readers hoping to buy Park Aerospace Corp. (NYSE:PKE) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 30th of September to receive the dividend, which will be paid on the 5th of November.
Park Aerospace'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. Based on the last year's worth of payments, Park Aerospace has a trailing yield of 2.2% on the current stock price of $18.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Last year, Park Aerospace paid out 99% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Over the past year it paid out 142% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Park Aerospace does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
As Park Aerospace's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Park Aerospace's earnings have been skyrocketing, up 40% per annum for the past five years. Earnings per share have been growing rapidly, but the company is paying out an uncomfortably high percentage of its earnings as dividends. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Park Aerospace has delivered an average of 2.3% per year annual increase in its dividend, based on the past ten years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Park Aerospace is keeping back more of its profits to grow the business.
From a dividend perspective, should investors buy or avoid Park Aerospace? While it's nice to see earnings per share growing, we're curious about how Park Aerospace intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Want to learn more about Park Aerospace's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
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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