Read This Before Considering K-Bro Linen Inc. (TSE:KBL) For Its Upcoming CA$0.10 Dividend

Readers hoping to buy K-Bro Linen Inc. (TSE:KBL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Therefore, if you purchase K-Bro Linen's shares on or after the 31st of December, you won't be eligible to receive the dividend, when it is paid on the 15th of January.

The company's next dividend payment will be CA$0.10 per share, on the back of last year when the company paid a total of CA$1.20 to shareholders. Looking at the last 12 months of distributions, K-Bro Linen has a trailing yield of approximately 3.4% on its current stock price of CA$35.14. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether K-Bro Linen has been able to grow its dividends, or if the dividend might be cut.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. K-Bro Linen paid out more than half (69%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 36% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that K-Bro Linen's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

See our latest analysis for K-Bro Linen

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. With that in mind, we're encouraged by the steady growth at K-Bro Linen, with earnings per share up 7.7% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

We'd also point out that K-Bro Linen issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the K-Bro Linen dividends are largely the same as they were 10 years ago.

Final Takeaway

Should investors buy K-Bro Linen for the upcoming dividend? While earnings per share growth has been modest, K-Bro Linen's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. To summarise, K-Bro Linen looks okay on this analysis, although it doesn't appear a stand-out opportunity.

In light of that, while K-Bro Linen has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 4 warning signs for K-Bro Linen that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.