Constellation Brands' (NYSE:STZ) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Constellation Brands, Inc. (NYSE:STZ) has announced that it will be increasing its dividend on the 19th of May to US$0.80. Although the dividend is now higher, the yield is only 1.2%, which is below the industry average.

View our latest analysis for Constellation Brands

Constellation Brands Might Find It Hard To Continue The Dividend

If it is predictable over a long period, even low dividend yields can be attractive. Constellation Brands is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in the business. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.

Over the next year, EPS might fall by 24.3% based on recent performance. While this means that the company will be unprofitable, we generally believe cash flows are more important, and the current cash payout ratio is quite healthy, which gives us comfort.

Constellation Brands Is Still Building Its Track Record

It is great to see that Constellation Brands 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 2015, the dividend has gone from US$1.24 to US$3.20. This implies that the company grew its distributions at a yearly rate of about 15% over that duration. We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

The Dividend Has Limited Growth Potential

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, things aren't all that rosy. Earnings per share has been sinking by 24% over the last five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think Constellation Brands' payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Constellation Brands that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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