Readers hoping to buy Bunzl plc (LON:BNZL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Bunzl’s shares before the 21st of May in order to be eligible for the dividend, which will be paid on the 2nd of July.
The company’s next dividend payment will be UK£0.539 per share, on the back of last year when the company paid a total of UK£0.74 to shareholders. Calculating the last year’s worth of payments shows that Bunzl has a trailing yield of 3.2% on the current share price of UK£23.32. If you buy this business for its dividend, you should have an idea of whether Bunzl’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are 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. Bunzl is paying out an acceptable 52% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Bunzl generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 29% of the free cash flow it generated, which is a comfortable payout ratio.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Check out our latest analysis for Bunzl
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we’re encouraged by the steady growth at Bunzl, with earnings per share up 2.1% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company’s prospects for future growth.
