July 24, 2024

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BEK.B) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see The Becker Milk Company Limited (TSE:BEK.B) is about to trade ex-dividend in the next 2 days. Investors can purchase shares before the 17th of March in order to be eligible for this dividend, which will be paid on the 27th of March.

Becker Milk’s next dividend payment will be CA$0.40 per share, on the back of last year when the company paid a total of CA$0.80 to shareholders. Based on the last year’s worth of payments, Becker Milk stock has a trailing yield of around 6.5% on the current share price of CA$12.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Becker Milk

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. Last year Becker Milk paid out 107% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Becker Milk paid out more free cash flow than it generated – 151%, to be precise – last year, which we think is concerningly high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Becker Milk’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Becker Milk paid out over the last 12 months.

TSX:BEK.B Historical Dividend Yield, March 14th 2020

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That’s why it’s comforting to see Becker Milk’s earnings have been skyrocketing, up 54% per annum for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we are comfortable with, based on current earnings. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Becker Milk has increased its dividend at approximately 2.9% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Becker Milk is keeping back more of its profits to grow the business.

Final Takeaway

From a dividend perspective, should investors buy or avoid Becker Milk? While it’s nice to see earnings per share growing, we’re curious about how Becker Milk intends to continue growing, or maintain the dividend in a downturn given that it’s paying out such a high percentage of its earnings and cashflow. Bottom line: Becker Milk has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you’re still interested in Becker Milk and want to know more, you’ll find it very useful to know what risks this stock faces. Be aware that Becker Milk is showing 5 warning signs in our investment analysis, and 1 of those shouldn’t be ignored…

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.

If you spot an error that warrants correction, please contact the editor at [email protected]. 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.

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. Thank you for reading.

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