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Dow Inc. (NYSE:DOW) is about to trade ex-dividend in the next four 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 as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Dow's shares on or after the 27th of May, you won't be eligible to receive the dividend, when it is paid on the 11th of June.
The company's next dividend payment will be US$0.70 per share. Last year, in total, the company distributed US$2.80 to shareholders. Based on the last year's worth of payments, Dow stock has a trailing yield of around 4.1% on the current share price of $68.83. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Dow can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Dow paid out 106% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Over the last year it paid out 61% of its free cash flow as dividends, within the usual range for most companies.
It's good to see that while Dow's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 encouraging to see Dow has grown its earnings rapidly, up 209% a year for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the Dow dividends are largely the same as they were two years ago.
To Sum It Up
Should investors buy Dow for the upcoming dividend? Growing earnings per share and a normal cashflow payout ratio is an ok combination, but we're concerned that the company is paying out such a high percentage of its income as dividends. Overall, it's hard to get excited about Dow from a dividend perspective.
However if you're still interested in Dow as a potential investment, you should definitely consider some of the risks involved with Dow. For example, we've found 2 warning signs for Dow that we recommend you consider before investing in the business.
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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