Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Karat Packaging Inc. (NASDAQ:KRT) is about to trade ex-dividend in the next 3 days.  The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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.   Accordingly, Karat Packaging investors that purchase the stock on or after the 16th of May will not receive the dividend, which will be paid on the 24th of May.  

The company's next dividend payment will be US$0.35 per share, on the back of last year when the company paid a total of US$1.95 to shareholders.  Based on the last year's worth of payments, Karat Packaging stock has a trailing yield of around 7.3% on the current share price of US$26.71.    We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose!  So we need to check whether the dividend payments are covered, and if earnings are growing.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable.   Karat Packaging is paying out just 18% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events.     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.     Over the last year it paid out 70% of its free cash flow as dividends, within the usual range for most companies.    

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:KRT Historic Dividend May 12th 2024

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.     That's why it's comforting to see Karat Packaging's earnings have been skyrocketing, up 302% per annum for the past five years.        

Given that Karat Packaging has only been paying a dividend for a year, there's not much of a past history to draw insight from.  

The Bottom Line

Should investors buy Karat Packaging for the upcoming dividend?      From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow.        Karat Packaging looks solid on this analysis overall, and we'd definitely consider investigating it more closely.  

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces.     Every company has risks, and we've spotted 1 warning sign for Karat Packaging you should know about.  

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.