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 Avery Dennison Corporation (NYSE:AVY) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 3rd of March will not receive this dividend, which will be paid on the 18th of March.
Avery Dennison's next dividend payment will be US$0.58 per share. Last year, in total, the company distributed US$2.32 to shareholders. Looking at the last 12 months of distributions, Avery Dennison has a trailing yield of approximately 1.9% on its current stock price of $119.85. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Avery Dennison can afford its dividend, and if the dividend could grow.
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. Avery Dennison paid out 63% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 39% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Avery Dennison'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.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Avery Dennison, with earnings per share up 6.3% on average over the last five years. Decent historical earnings per share growth suggests Avery Dennison has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Avery Dennison has lifted its dividend by approximately 3.5% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Has Avery Dennison got what it takes to maintain its dividend payments? While earnings per share growth has been modest, Avery Dennison's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. All things considered, we are not particularly enthused about Avery Dennison from a dividend perspective.
Ever wonder what the future holds for Avery Dennison? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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