Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Ecolab Inc. (NYSE:ECL) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 16th of March will not receive this dividend, which will be paid on the 15th of April.
Ecolab's next dividend payment will be US$0.47 per share, on the back of last year when the company paid a total of US$1.88 to shareholders. Calculating the last year's worth of payments shows that Ecolab has a trailing yield of 1.0% on the current share price of $190.85. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's 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. Ecolab paid out a comfortable 34% of its profit last year. A useful secondary check can be to evaluate whether Ecolab generated enough free cash flow to afford its dividend. Fortunately, it paid out only 34% of its free cash flow in the past year.
It's positive to see that Ecolab's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. With that in mind, we're encouraged by the steady growth at Ecolab, with earnings per share up 6.2% on average over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Ecolab has delivered 13% dividend growth per year on average over the past ten years. 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.
Is Ecolab worth buying for its dividend? Earnings per share growth has been growing somewhat, and Ecolab 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. It might be nice to see earnings growing faster, but Ecolab is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Ecolab, and we would prioritise taking a closer look at it.
On that note, you'll want to research what risks Ecolab is facing. For example, we've found 1 warning sign for Ecolab 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.
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.
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