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K-Bro Linen Inc. (TSE:KBL) will pay a dividend of CA$0.10 on the 15th of June. This makes the dividend yield 3.8%, which will augment investor returns quite nicely.
View our latest analysis for K-Bro Linen
K-Bro Linen's Dividend Is Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, the company was paying out 202% of what it was earning and 87% of cash flows. While the cash payout ratio isn't necessarily a cause for concern, the company is probably focusing more on returning cash to shareholders than growing the business.
Analysts expect a massive rise in earnings per share in the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 35%, which is in a comfortable range for us.
K-Bro Linen Has A Solid Track Record
The company has an extended history of paying stable dividends. The dividend has gone from an annual total of CA$1.15 in 2013 to the most recent total annual payment of CA$1.20. Dividend payments have grown at less than 1% a year over this period. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
K-Bro Linen May Find It Hard To Grow The Dividend
Investors could be attracted to the stock based on the quality of its payment history. Earnings per share has been crawling upwards at 2.4% per year. With anaemic earnings growth, it's not confidence inspiring to see K-Bro Linen paying out more than double what it is earning. Meaning that on balance, the dividend is more likely to fall in the future than to grow.
K-Bro Linen's Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would be a touch cautious of relying on this stock primarily for the dividend income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for K-Bro Linen that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.