The board of Big Lots, Inc. (NYSE:BIG) has announced that it will pay a dividend on the 23rd of September, with investors receiving $0.30 per share. The dividend yield will be 5.0% based on this payment which is still above the industry average.
Big Lots' Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Despite not generating a profit, Big Lots is still paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.
Looking forward, earnings per share is forecast to rise exponentially over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 5.7%, so there isn't too much pressure on the dividend.
Big Lots Is Still Building Its Track Record
It is great to see that Big Lots has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2014, the annual payment back then was $0.68, compared to the most recent full-year payment of $1.20. This means that it has been growing its distributions at 7.4% per annum over that time. The dividend has been growing as a reasonable rate, which we like. However, investors will probably want to see a longer track record before they consider Big Lots to be a consistent dividend paying stock.
The Company Could Face Some Challenges Growing The Dividend
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Big Lots has impressed us by growing EPS at 12% per year over the past five years. It's not an ideal situation that the company isn't turning a profit but the growth recently is a positive sign. Assuming the company can post positive net income numbers soon, it could has the potential to be a decent dividend payer.
Big Lots' Dividend Doesn't Look Sustainable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. Strong earnings growth means Big Lots has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Big Lots that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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