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 The Eastern Company (NASDAQ:EML) is about to go ex-dividend in just four days. You can purchase shares before the 13th of August in order to receive the dividend, which the company will pay on the 15th of September.
Eastern's next dividend payment will be US$0.11 per share, and in the last 12 months, the company paid a total of US$0.44 per share. Based on the last year's worth of payments, Eastern has a trailing yield of 2.3% on the current stock price of $19.31. If you buy this business for its dividend, you should have an idea of whether Eastern's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Fortunately Eastern's payout ratio is modest, at just 27% of profit. A useful secondary check can be to evaluate whether Eastern generated enough free cash flow to afford its dividend. The good news is it paid out just 17% of its free cash flow in the last year.
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?
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. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Eastern earnings per share are up 5.8% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Eastern has lifted its dividend by approximately 2.0% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is Eastern an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Eastern is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Eastern is halfway there. There's a lot to like about Eastern, and we would prioritise taking a closer look at it.
In light of that, while Eastern has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 2 warning signs for Eastern 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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