Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that CRA International, Inc. (NASDAQ:CRAI) is about to go ex-dividend in just four days. If you purchase the stock on or after the 24th of August, you won’t be eligible to receive this dividend, when it is paid on the 14th of September.
CRA International’s next dividend payment will be US$0.23 per share, on the back of last year when the company paid a total of US$0.92 to shareholders. Based on the last year’s worth of payments, CRA International has a trailing yield of 2.0% on the current stock price of $45.45. 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 investigate whether CRA International can afford its dividend, and if the dividend could grow.
See our latest analysis for CRA International
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately CRA International’s payout ratio is modest, at just 30% of profit. 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. Over the last year, it paid out dividends equivalent to 208% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since CRA International is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
While CRA International’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Cash is king, as they say, and were CRA International to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
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. For this reason, we’re glad to see CRA International’s earnings per share have risen 16% per annum over the last five years. Earnings have been growing at a decent rate, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last four years, CRA International has lifted its dividend by approximately 13% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
From a dividend perspective, should investors buy or avoid CRA International? We’re glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it’s not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. All things considered, we are not particularly enthused about CRA International from a dividend perspective.
On that note, you’ll want to research what risks CRA International is facing. To help with this, we’ve discovered 1 warning sign for CRA International that you should be aware of before investing in their shares.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]