Regular readers will know we love our dividends at Simply Wall St, which is why it’s exciting to see Costa Group Holdings Limited (ASX: CGC) is set to trade ex-dividend within the next 4 days. Typically, the ex-dividend date is one business day prior to the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is important because the settlement process involves two full business days. So if you miss this date, you would not appear on the company’s books on the date of registration. Thus, you can buy shares of Costa Group Holdings before September 15 in order to receive the dividend that the company will pay on October 7.
The company’s next dividend payment will be A $ 0.04 per share, and over the past 12 months the company has paid a total of A $ 0.09 per share. Calculating the value of last year’s payouts shows Costa Group Holdings has a rolling 2.8% return on the current share price of AU $ 3.24. We love to see companies pay a dividend, but it’s also important to make sure that laying the golden eggs is not going to kill our goose that lays the golden eggs! So we need to determine whether Costa Group Holdings can afford its dividend and whether the dividend could increase.
Check out our latest analysis for Costa Group Holdings
If a company pays more dividends than it has earned, then the dividend could become unsustainable – which is not an ideal situation. Costa Group Holdings pays an acceptable level of 66% of its profits, a payment level common to most companies. A useful secondary check can be to assess whether Costa Group Holdings has generated enough free cash flow to pay its dividend. Fortunately, its dividend payments only took 43% of the free cash flow it generated, which is a comfortable payout ratio.
It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.
Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.
Have profits and dividends increased?
Stocks of companies that generate sustainable earnings growth often offer the best dividend prospects because it’s easier to raise the dividend when earnings rise. If profits fall enough, the company could be forced to cut its dividend. That’s why it’s heartwarming to see Costa Group Holdings’ profits soar, rising 34% annually over the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends and reinvesting in growth. Earnings per share have grown rapidly, and in combination with some reinvestment and an average payout ratio, the stock may have decent dividend prospects going forward.
Most investors primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Since our data began six years ago, Costa Group Holdings has increased its dividend by around 7.0% per year on average. We are happy to see dividends increasing alongside earnings over multiple years, which may be a sign that the company intends to share the growth with its shareholders.
Is Costa Group Holdings an attractive dividend-paying stock, or rather left on the back burner? We like the growth in earnings per share of Costa Group Holdings and the fact that although its payout ratio is in the middle, it paid a lower percentage of its cash flow. There is a lot to love about Costa Group Holdings, and we would prioritize taking a closer look.
So while Costa Group Holdings looks good from a dividend standpoint, it’s still worth being aware of the risks involved in this title. Our analysis shows 3 warning signs for Costa Group Holdings and you should be aware of this before buying any stocks.
If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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