Here's Why We're Wary Of Buying EnPro Industries' (NYSE:NPO) For Its Upcoming Dividend
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 EnPro Industries, Inc. (NYSE:NPO) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Thus, you can purchase EnPro Industries' shares before the 28th of February in order to receive the dividend, which the company will pay on the 15th of March.
The company's next dividend payment will be US$0.29 per share. Last year, in total, the company distributed US$1.16 to shareholders. Based on the last year's worth of payments, EnPro Industries stock has a trailing yield of around 1.1% on the current share price of $110.44. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for EnPro Industries
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. Last year, EnPro Industries paid out 348% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. 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. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.
It's good to see that while EnPro Industries's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. EnPro Industries's earnings per share have plummeted approximately 58% 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. In the last eight years, EnPro Industries has lifted its dividend by approximately 4.8% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. EnPro Industries is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
To Sum It Up
Is EnPro Industries an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 348% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in EnPro Industries's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: EnPro Industries has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with EnPro Industries. To help with this, we've discovered 2 warning signs for EnPro Industries that you should be aware of before investing in their shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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