Here's Why We're Wary Of Buying Cake Box Holdings' (LON:CBOX) For Its Upcoming Dividend
Readers hoping to buy Cake Box Holdings Plc (LON:CBOX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase Cake Box Holdings' shares before the 13th of August to receive the dividend, which will be paid on the 9th of September.
The company's upcoming dividend is UK£0.072 a share, following on from the last 12 months, when the company distributed a total of UK£0.11 per share to shareholders. Calculating the last year's worth of payments shows that Cake Box Holdings has a trailing yield of 5.3% on the current share price of UK£2.025. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
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, Cake Box Holdings paid out 91% 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 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. It paid out 93% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
Cash is slightly more important than profit from a dividend perspective, but given Cake Box Holdings's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Check out our latest analysis for Cake Box Holdings
Click here to see how much of its profit Cake Box Holdings paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Cake Box Holdings, with earnings per share up 7.1% on average over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Cake Box Holdings has delivered 21% dividend growth per year on average over the past eight years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Final Takeaway
Has Cake Box Holdings got what it takes to maintain its dividend payments? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Cake Box Holdings.
With that being said, if you're still considering Cake Box Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 2 warning signs for Cake Box Holdings (of which 1 is a bit concerning!) you should know about.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.