Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see WK Kellogg Co (NYSE:KLG) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase WK Kellogg Co's shares on or after the 31st of May will not receive the dividend, which will be paid on the 14th of June.
The company's next dividend payment will be US$0.16 per share, on the back of last year when the company paid a total of US$0.64 to shareholders. Looking at the last 12 months of distributions, WK Kellogg Co has a trailing yield of approximately 3.3% on its current stock price of US$19.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
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. WK Kellogg Co paid out just 23% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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 an unsustainably high 286% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since WK Kellogg Co is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
WK Kellogg Co paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to WK Kellogg Co's ability to maintain its dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Unfortunately WK Kellogg Co has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
Final Takeaway
Is WK Kellogg Co worth buying for its dividend? We like that WK Kellogg Co has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
In light of that, while WK Kellogg Co has an appealing dividend, it's worth knowing the risks involved with this stock. In terms of investment risks, we've identified 3 warning signs with WK Kellogg Co and understanding them should be part of your investment process.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.