Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see CDK Global, Inc. (NASDAQ:CDK) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 5th of March will not receive this dividend, which will be paid on the 30th of March.
CDK Global's next dividend payment will be US$0.15 per share. Last year, in total, the company distributed US$0.60 to shareholders. Last year's total dividend payments show that CDK Global has a trailing yield of 1.2% on the current share price of $50.14. If you buy this business for its dividend, you should have an idea of whether CDK Global's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Check out our latest analysis for CDK Global
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. That's why it's good to see CDK Global paying out a modest 26% of its earnings. A useful secondary check can be to evaluate whether CDK Global generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 26% of the free cash flow it generated, which is a comfortable payout ratio.
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.
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. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, CDK Global's earnings per share have been growing at 16% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. CDK Global has delivered an average of 3.8% per year annual increase in its dividend, based on the past six years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because CDK Global is keeping back more of its profits to grow the business.