Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Pentair plc (NYSE:PNR) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 17th of October to receive the dividend, which will be paid on the 1st of November.
Pentair's upcoming dividend is US$0.2 a share, following on from the last 12 months, when the company distributed a total of US$0.7 per share to shareholders. Based on the last year's worth of payments, Pentair has a trailing yield of 1.9% on the current stock price of $37.36. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Pentair's payout ratio is modest, at just 35% of profit. A useful secondary check can be to evaluate whether Pentair generated enough free cash flow to afford its dividend. It distributed 40% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Pentair'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. So we're not too excited that Pentair's earnings are down 4.2% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Pentair's dividend payments are broadly unchanged compared to where they were ten years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.
From a dividend perspective, should investors buy or avoid Pentair? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. Overall, it's hard to get excited about Pentair from a dividend perspective.
Ever wonder what the future holds for Pentair? See what the 16 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. Thank you for reading.