Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Office Depot, Inc. (NASDAQ:ODP) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 22nd of August to receive the dividend, which will be paid on the 13th of September.
Office Depot's next dividend payment will be US$0.025 per share. Last year, in total, the company distributed US$0.10 to shareholders. Based on the last year's worth of payments, Office Depot stock has a trailing yield of around 6.9% on the current share price of $1.44. 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 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. Office Depot distributed an unsustainably high 176% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while Office Depot's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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. It's encouraging to see Office Depot has grown its earnings rapidly, up 33% a year for the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the Office Depot dividends are largely the same as they were three years ago.
Is Office Depot worth buying for its dividend? Earnings per share have been rising nicely although, even though its cashflow payout ratio is low, we question why Office Depot is paying out so much of its profit. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
Wondering what the future holds for Office Depot? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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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If you spot an error that warrants correction, please contact the editor at email@example.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.