Don’t Race Out To Buy Abercrombie & Fitch Co. (NYSE:ANF) Just …

Abercrombie & Fitch Co. (NYSE:ANF) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 5th of March will not receive the dividend, which will be paid on the 16th of March.

Abercrombie & Fitch’s next dividend payment will be US$0.20 per share, on the back of last year when the company paid a total of US$0.80 to shareholders. Calculating the last year’s worth of payments shows that Abercrombie & Fitch has a trailing yield of 6.1% on the current share price of $13.13. 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 investigate whether Abercrombie & Fitch can afford its dividend, and if the dividend could grow.

View our latest analysis for Abercrombie & Fitch

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Abercrombie & Fitch paid out 98% of its income as dividends, which is above a level that we’re comfortable with, especially if the company needs to reinvest in its business. 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. Abercrombie & Fitch paid out more free cash flow than it generated – 154%, to be precise – last year, which we think is concerningly high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.

Abercrombie & Fitch does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As Abercrombie & Fitch’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

NYSE:ANF Historical Dividend Yield, February 29th 2020NYSE:ANF Historical Dividend Yield, February 29th 2020

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 earnings fall far enough, the company could be forced to cut its dividend. This is why it’s a relief to see Abercrombie & Fitch earnings per share are up 2.9% per annum over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Abercrombie & Fitch is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, Abercrombie & Fitch has increased its dividend at approximately 1.3% a year on average.

Final Takeaway

Is Abercrombie & Fitch an attractive dividend stock, or better left on the shelf? Abercrombie & Fitch is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for Abercrombie & Fitch? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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