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 Eaton Corporation plc (NYSE:ETN) is about to go ex-dividend in just three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Eaton’s shares before the 3rd of March to receive the dividend, which will be paid on the 24th of March.
The company’s upcoming dividend is US$0.86 a share, following on from the last 12 months, when the company distributed a total of US$3.24 per share to shareholders. Last year’s total dividend payments show that Eaton has a trailing yield of 2.0% on the current share price of $173.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for Eaton
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. Eaton paid out 52% of its earnings to investors last year, a normal payout level for most businesses. 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. Dividends consumed 67% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.
It’s positive to see that Eaton’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It’s not encouraging to see that Eaton’s earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Eaton has increased its dividend at approximately 8.5% a year on average.
The Bottom Line
Should investors buy Eaton for the upcoming dividend? Eaton has been unable to generate earnings growth, but at least its dividend looks sustainable, with its profit and cashflow payout ratios within reasonable limits. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of Eaton.
So if you’re still interested in Eaton despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 2 warning signs for Eaton and you should be aware of them before buying any shares.
Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.
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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.
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