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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Mueller Water Products, Inc. (NYSE:MWA) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 7th of August in order to receive the dividend, which the company will pay on the 20th of August.
Mueller Water Products's upcoming dividend is US$0.052 a share, following on from the last 12 months, when the company distributed a total of US$0.21 per share to shareholders. Looking at the last 12 months of distributions, Mueller Water Products has a trailing yield of approximately 2.1% on its current stock price of $10.12. 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 investigate whether Mueller Water Products can afford its dividend, and if the dividend could grow.
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. That's why it's good to see Mueller Water Products paying out a modest 30% of its earnings. A useful secondary check can be to evaluate whether Mueller Water Products generated enough free cash flow to afford its dividend. Over the past year it paid out 130% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
While Mueller Water Products's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Mueller Water Products's ability to maintain its dividend.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Mueller Water Products's earnings per share have been growing at 14% a year for the past five years. Earnings have been growing at a decent 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. Mueller Water Products has delivered 12% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Should investors buy Mueller Water Products for the upcoming dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
On that note, you'll want to research what risks Mueller Water Products is facing. Case in point: We've spotted 1 warning sign for Mueller Water Products 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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