Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Carriage Services, Inc. (NYSE:CSV) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 7th of August in order to be eligible for this dividend, which will be paid on the 1st of September.
Carriage Services's next dividend payment will be US$0.087 per share, on the back of last year when the company paid a total of US$0.35 to shareholders. Based on the last year's worth of payments, Carriage Services stock has a trailing yield of around 1.6% on the current share price of $22.11. If you buy this business for its dividend, you should have an idea of whether Carriage Services's dividend is reliable and sustainable. So we need to investigate whether Carriage Services can afford its dividend, and if the dividend could grow.
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, Carriage Services paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. It paid out 13% of its free cash flow as dividends last year, which is conservatively low.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Carriage Services fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Carriage Services's earnings per share have fallen at approximately 19% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past nine years, Carriage Services has increased its dividend at approximately 15% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Carriage Services is already paying out 101% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
From a dividend perspective, should investors buy or avoid Carriage Services? It's not a great combination to see a company with earnings in decline and paying out 101% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think Carriage Services is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Carriage Services and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 4 warning signs for Carriage Services (1 is potentially serious!) that deserve your attention before investing in the shares.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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