High dividend stocks can be attractive options for investors. Their payments can generate significant recurring income and increase the overall return on stock ownership.

But any time a yield approaches 5%, it’s worth asking whether it’s safe, because the last thing you want is to buy a stock for its dividend, just to reduce the payout in a near future.

Kraft-Heinz (KHC -1.63%) pays a high dividend which today yields around 4.8%. And not long ago, the popular food company reduced its payouts to bring them down to a more manageable level.

With the company recently reporting results that aren’t very impressive, is it possible that another dividend cut is coming, or is this a safer solution? dividend stocks than it seems?

Are Kraft’s profits high enough to maintain its current dividend rate?

Over the past 12 months, Kraft generated $26.1 billion in sales, but its profit margin this amount was quite light, with net income totaling only $1.4 billion. Most recently, the company suffered a net loss of $290 million for the period ending September 28, largely due to impairment charges related to goodwill and intangible assets – they totaled more than $1.4 billion. dollars.

The company’s diluted earnings per share over the last four quarters are $1.11, less than the $1.60 it pays in dividends per share over the course of a full year. This puts its distribution rate at more than 144%.

Based on such a high payout ratio, one could assume that the dividend is unsustainable and that another reduction could be possible (the company reduced its dividend in 2019).

But it’s a good example of one of the key limitations of the payout ratio, which is that a bad quarter can have a significant impact on the multiple, because any negative effect on earnings can make the dividend appear is not sustainable. Although the company posted a loss last quarter following non-cash writedowns, this may not accurately reflect its ability to continue paying the current dividend.

Another way for investors to assess the safety of Kraft’s dividends

Rather than relying on profits, investors can use free cash flow (FCF) to help determine if the company’s dividend is manageable. Since this involves looking at cash flows only, this will exclude the effect of non-cash charges such as depreciation.

Last quarter, FCF totaled $849 million and over the past 12 months, the company generated over $3 billion. Over a full year, Kraft pays less than $2 billion in cash dividends, suggesting that the dividend is indeed safe based on its FCF.

Kraft announced a quarterly dividend of $0.40 on October 30, the same day the company reported its latest results. It therefore does not seem to be worried – at least not yet – about its ability to maintain the current dividend.

Is Kraft a safe dividend stock to own?

The company’s dividend is safer than it seems since the company generates enough FCF to continue making regular payments. There may even be a case for an increase in the future – but this is by no means a guarantee. Overall, if you’re looking for a good dividend stock, Kraft Heinz can be a great option to add to your portfolio.