Readers hoping to buy Parker-Hannifin Corporation (NYSE:PH) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 27th of August in order to receive the dividend, which the company will pay on the 11th of September.
Parker-Hannifin's next dividend payment will be US$0.88 per share, and in the last 12 months, the company paid a total of US$3.52 per share. Last year's total dividend payments show that Parker-Hannifin has a trailing yield of 1.7% on the current share price of $206.32. 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 Parker-Hannifin can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Parker-Hannifin paid out a comfortable 37% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 25% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Parker-Hannifin'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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Parker-Hannifin, with earnings per share up 5.8% on average over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Parker-Hannifin has delivered 13% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
From a dividend perspective, should investors buy or avoid Parker-Hannifin? Earnings per share have been growing moderately, and Parker-Hannifin 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 Parker-Hannifin is halfway there. It's a promising combination that should mark this company worthy of closer attention.
On that note, you'll want to research what risks Parker-Hannifin is facing. For example - Parker-Hannifin has 3 warning signs we think you should be aware of.
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.
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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