Do These 3 Checks Before Buying K-Bro Linen Inc. (TSE:KBL) For Its Upcoming Dividend

Readers hoping to buy K-Bro Linen Inc. (TSE:KBL) 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 27th of February, you won't be eligible to receive this dividend, when it is paid on the 13th of March.

K-Bro Linen's next dividend payment will be CA$0.10 per share, and in the last 12 months, the company paid a total of CA$1.20 per share. Looking at the last 12 months of distributions, K-Bro Linen has a trailing yield of approximately 2.6% on its current stock price of CA$45.85. If you buy this business for its dividend, you should have an idea of whether K-Bro Linen's dividend is reliable and sustainable. As a result, readers should always check whether K-Bro Linen has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for K-Bro Linen

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. K-Bro Linen distributed an unsustainably high 129% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 51% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while K-Bro Linen'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.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. K-Bro Linen's earnings per share have fallen at approximately 8.8% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

K-Bro Linen also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, K-Bro Linen has increased its dividend at approximately 0.9% a year on average.

The Bottom Line

Has K-Bro Linen got what it takes to maintain its dividend payments? Earnings per share have been shrinking in recent times. Worse, K-Bro Linen's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for K-Bro Linen? See what the six analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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 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.

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