Federal Signal Corporation (NYSE:FSS) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 13th of August in order to be eligible for this dividend, which will be paid on the 28th of August.
Federal Signal's next dividend payment will be US$0.08 per share, on the back of last year when the company paid a total of US$0.32 to shareholders. Calculating the last year's worth of payments shows that Federal Signal has a trailing yield of 1.1% on the current share price of $29.49. If you buy this business for its dividend, you should have an idea of whether Federal Signal's dividend is reliable and sustainable. So we need to investigate whether Federal Signal 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. Federal Signal is paying out just 18% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Federal Signal generated enough free cash flow to afford its dividend. It distributed 30% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Federal Signal's earnings per share have dropped 6.5% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Federal Signal has delivered 2.9% dividend growth per year on average over the past 10 years.
The Bottom Line
Is Federal Signal worth buying for its dividend? Federal Signal has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Wondering what the future holds for Federal Signal? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.