Today we'll take a closer look at Espey Mfg. & Electronics Corp. (NYSEMKT:ESP) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
With Espey Mfg. & Electronics yielding 4.3% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 101% of Espey Mfg. & Electronics's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Espey Mfg. & Electronics paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
While the above analysis focuses on dividends relative to a company's earnings, we do note Espey Mfg. & Electronics's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Espey Mfg. & Electronics has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was US$2.40 in 2009, compared to US$1.00 last year. The dividend has shrunk at around 8.4% a year during that period. Espey Mfg. & Electronics's dividend has been cut sharply at least once, so it hasn't fallen by 8.4% every year, but this is a decent approximation of the long term change.
We struggle to make a case for buying Espey Mfg. & Electronics for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's good to see Espey Mfg. & Electronics has been growing its earnings per share at 14% a year over the past five years. While EPS are growing rapidly, Espey Mfg. & Electronics paid out a very high 101% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Overall, Espey Mfg. & Electronics falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Espey Mfg. & Electronics stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.