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Why It Might Not Make Sense To Buy Brambles Limited (ASX:BXB) For Its Upcoming Dividend

Simply Wall St

Brambles Limited (ASX:BXB) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 11th of September in order to be eligible for this dividend, which will be paid on the 10th of October.

Brambles's next dividend payment will be US$0.14 per share. Last year, in total, the company distributed US$0.19 to shareholders. Based on the last year's worth of payments, Brambles stock has a trailing yield of around 2.5% on the current share price of A$11.27. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Brambles

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. Brambles paid out 71% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Brambles generated enough free cash flow to afford its dividend. It paid out an unsustainably high 303% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Brambles intends to continue funding this dividend, or if it could be forced to the payment.

While Brambles's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Brambles's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ASX:BXB Historical Dividend Yield, September 7th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Brambles's 5.3% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Brambles's dividend payments per share have declined at 1.3% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

Should investors buy Brambles for the upcoming dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Brambles? See what the nine 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.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.