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H.B. Fuller Company (NYSE:FUL) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 21st of April will not receive the dividend, which will be paid on the 6th of May.
H.B. Fuller's upcoming dividend is US$0.17 a share, following on from the last 12 months, when the company distributed a total of US$0.65 per share to shareholders. Based on the last year's worth of payments, H.B. Fuller has a trailing yield of 1.0% on the current stock price of $65.52. 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. H.B. Fuller has a low and conservative payout ratio of just 24% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Luckily it paid out just 14% of its free cash flow last year.
It's positive to see that H.B. Fuller'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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see H.B. Fuller earnings per share are up 9.4% per annum over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. H.B. Fuller has delivered an average of 9.1% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid H.B. Fuller? Earnings per share have been growing moderately, and H.B. Fuller is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. 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 H.B. Fuller is halfway there. H.B. Fuller looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
In light of that, while H.B. Fuller has an appealing dividend, it's worth knowing the risks involved with this stock. For example, H.B. Fuller has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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