Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Recently, GrafTech International Ltd. (NYSE:EAF) has started paying dividends to shareholders. Today it yields 2.5%. Should it have a place in your portfolio? Let’s take a look at GrafTech International in more detail.
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5 checks you should use to assess a dividend stock
Whenever I am looking at a potential dividend stock investment, I always check these five metrics:
- Is its annual yield among the top 25% of dividend-paying companies?
- Has it paid dividend every year without dramatically reducing payout in the past?
- Has dividend per share risen in the past couple of years?
- Is its earnings sufficient to payout dividend at the current rate?
- Will it be able to continue to payout at the current rate in the future?
How does GrafTech International fare?
The current trailing twelve-month payout ratio for the stock is 6.4%, which means that the dividend is covered by earnings. In the near future, analysts are predicting a higher payout ratio of 9.5% which, assuming the share price stays the same, leads to a dividend yield of around 2.6%. Furthermore, EPS should increase to $3.26. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. Unfortunately, it is really too early to view GrafTech International as a dividend investment. Last year was the company’s first dividend payment, so it is certainly early days. The standard practice for reliable payers is to look for 10 or so years of track record.
Relative to peers, GrafTech International has a yield of 2.5%, which is on the low-side for Electrical stocks.
If GrafTech International is in your portfolio for cash-generating reasons, there may be better alternatives out there. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three fundamental factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for EAF’s future growth? Take a look at our free research report of analyst consensus for EAF’s outlook.
- Valuation: What is EAF worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether EAF is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.