Kontoor Brands, Inc.'s (NYSE:KTB) dividend will be increasing from last year's payment of the same period to $0.50 on 18th of December. This will take the dividend yield to an attractive 4.1%, providing a nice boost to shareholder returns.
See our latest analysis for Kontoor Brands
Kontoor Brands' Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Kontoor Brands' dividend was comfortably covered by both cash flow and earnings. This indicates that quite a large proportion of earnings is being invested back into the business.
Looking forward, earnings per share is forecast to rise by 39.9% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 43% by next year, which is in a pretty sustainable range.
Kontoor Brands' Dividend Has Lacked Consistency
The track record isn't the longest, but we are already seeing a bit of instability in the payments. The annual payment during the last 4 years was $2.24 in 2019, and the most recent fiscal year payment was $2.00. This works out to be a decline of approximately 2.8% per year over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
The Dividend's Growth Prospects Are Limited
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Kontoor Brands has seen earnings per share falling at 3.9% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Kontoor Brands' payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. Overall, we don't think this company has the makings of a good income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Kontoor Brands that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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