Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Kumba Iron Ore Limited (JSE:KIO) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Kumba Iron Ore's shares before the 15th of March in order to be eligible for the dividend, which will be paid on the 20th of March.
The company's next dividend payment will be R16.30 per share, on the back of last year when the company paid a total of R32.60 to shareholders. Based on the last year's worth of payments, Kumba Iron Ore has a trailing yield of 6.8% on the current stock price of ZAR481.24. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Kumba Iron Ore has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for Kumba Iron Ore
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 Kumba Iron Ore paid out 96% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 99% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
Cash is slightly more important than profit from a dividend perspective, but given Kumba Iron Ore's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Kumba Iron Ore earnings per share are up 3.7% per annum over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Kumba Iron Ore is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.