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 Emerson Electric Co. ( NYSE:EMR ) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 12th of November, you won't be eligible to receive this dividend, when it is paid on the 10th of December.
Emerson Electric's next dividend payment will be US$0.505 per share, on the back of last year when the company paid a total of US$2.02 to shareholders. Calculating the last year's worth of payments shows that Emerson Electric has a trailing yield of 2.9% on the current share price of $70.12. If you buy this business for its dividend, you should have an idea of whether Emerson Electric'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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Emerson Electric paid out 61% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 48% of its free cash flow in the past year.
It's positive to see that Emerson Electric'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?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Emerson Electric's earnings per share have been shrinking at 2.8% a year over the previous five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Emerson Electric has lifted its dividend by approximately 4.2% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
To Sum It Up
From a dividend perspective, should investors buy or avoid Emerson Electric? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. Overall, it's hard to get excited about Emerson Electric from a dividend perspective.
With that being said, if dividends aren't your biggest concern with Emerson Electric, you should know about the other risks facing this business. For example - Emerson Electric has 1 warning sign we think you should be aware of.
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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