Just Four Days Till Eaton Corporation plc (NYSE:ETN) Will Be Trading Ex-Dividend
Readers hoping to buy Eaton Corporation plc (NYSE:ETN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Eaton investors that purchase the stock on or after the 12th of May will not receive the dividend, which will be paid on the 27th of May.
The company's next dividend payment will be US$0.81 per share, on the back of last year when the company paid a total of US$3.24 to shareholders. Last year's total dividend payments show that Eaton has a trailing yield of 2.2% on the current share price of $147.29. 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.
View our latest analysis for Eaton
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Eaton is paying out an acceptable 56% of its profit, a common payout level among most companies. 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. The company paid out 90% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Eaton paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Eaton to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Eaton, with earnings per share up 5.7% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Eaton has lifted its dividend by approximately 9.1% a year on average. 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.
The Bottom Line
Should investors buy Eaton for the upcoming dividend? Earnings per share have grown somewhat, although Eaton paid out over half its profits and the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Eaton.
So if you're still interested in Eaton despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 3 warning signs for Eaton and you should be aware of these before buying any shares.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.
