Yahoo Finance Read This Before Buying K-Bro Linen Inc. (TSE:KBL) For Its Dividend
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Is K-Bro Linen Inc. (TSE:KBL) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A high yield and a long history of paying dividends is an appealing combination for K-Bro Linen. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying K-Bro Linen for its dividend, and we'll go through these below.
Click the interactive chart for our full dividend analysis
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. K-Bro Linen paid out 209% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. K-Bro Linen paid out 1571% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Cash is slightly more important than profit from a dividend perspective, but given K-Bro Linen's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Is K-Bro Linen's Balance Sheet Risky?
As K-Bro Linen's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures a company's total debt load relative to its earnings (lower = less debt), while net interest cover measures the company's ability to pay the interest on its debt (higher = greater ability to pay interest costs). K-Bro Linen has net debt of 2.01 times its earnings before interest, tax, depreciation, and amortisation (EBITDA). Using debt can accelerate business growth, but also increases the risks.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. With EBIT of 3.15 times its interest expense, K-Bro Linen's interest cover is starting to look a bit thin.
We update our data on K-Bro Linen every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of K-Bro Linen's dividend payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was CA$1.10 in 2009, compared to CA$1.20 last year. Its dividends have grown at less than 1% per annum over this time frame.
It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? In the last five years, K-Bro Linen's earnings per share have shrunk at approximately 17% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
We'd also point out that K-Bro Linen issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. K-Bro Linen paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share are down, and K-Bro Linen's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with K-Bro Linen from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. See if the 7 analysts are forecasting a turnaround in our free collection of analyst estimates here.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.
