The board of Kontoor Brands, Inc. (NYSE:KTB) has announced that it will be paying its dividend of $0.50 on the 18th of December, an increased payment from last year's comparable dividend. This makes the dividend yield 4.1%, which is above the industry average.
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Kontoor Brands' dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.
Over the next year, EPS is forecast to expand by 39.9%. If the dividend continues on this path, the payout ratio could be 43% by next year, which we think can be pretty sustainable going forward.
Looking back, the company hasn't been paying the most consistent dividend, but with such a short dividend history it could be too early to draw solid conclusions. Since 2019, the annual payment back then was $2.24, compared to the most recent full-year payment of $2.00. Doing the maths, this is a decline of about 2.8% per year. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Kontoor Brands' EPS has declined at around 3.9% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Kontoor Brands that investors need to be conscious of moving forward. Is Kontoor Brands not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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