It looks like Flowers Foods, Inc. ( NYSE:FLO ) is about to go ex-dividend in the next 3 days. You will need to purchase shares before the 29th of August to receive the dividend, which will be paid on the 13th of September.
Flowers Foods's next dividend payment will be US$0.19 per share. Last year, in total, the company distributed US$0.76 to shareholders. Based on the last year's worth of payments, Flowers Foods stock has a trailing yield of around 3.3% on the current share price of $23. If you buy this business for its dividend, you should have an idea of whether Flowers Foods's dividend is reliable and sustainable. So we need to investigate whether Flowers Foods can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 86% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Flowers Foods generated enough free cash flow to afford its dividend. Over the last year it paid out 60% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Flowers Foods's earnings per share have fallen at approximately 5.2% a year over the previous 5 years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Flowers Foods has lifted its dividend by approximately 11% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Flowers Foods is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Has Flowers Foods got what it takes to maintain its dividend payments? While earnings per share are shrinking, it's encouraging to see that at least Flowers Foods's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think Flowers Foods is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Ever wonder what the future holds for Flowers Foods? See what the seven 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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