Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Hewlett Packard Enterprise Company (NYSE:HPE) is about to trade ex-dividend in the next 4 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. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Hewlett Packard Enterprise's shares on or after the 15th of June, you won't be eligible to receive the dividend, when it is paid on the 7th of July.
The company's upcoming dividend is US$0.12 a share, following on from the last 12 months, when the company distributed a total of US$0.48 per share to shareholders. Last year's total dividend payments show that Hewlett Packard Enterprise has a trailing yield of 3.1% on the current share price of $15.65. 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 Hewlett Packard Enterprise can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year Hewlett Packard Enterprise paid out 96% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while Hewlett Packard Enterprise's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Hewlett Packard Enterprise's earnings per share have fallen at approximately 19% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Hewlett Packard Enterprise has delivered an average of 14% per year annual increase in its dividend, based on the past six years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Hewlett Packard Enterprise is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Is Hewlett Packard Enterprise an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 96% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Hewlett Packard Enterprise's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Hewlett Packard Enterprise is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
With that being said, if you're still considering Hewlett Packard Enterprise as an investment, you'll find it beneficial to know what risks this stock is facing. In terms of investment risks, we've identified 4 warning signs with Hewlett Packard Enterprise and understanding them should be part of your investment process.
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.
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. 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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