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Is It Smart To Buy American Eagle Outfitters, Inc. (NYSE:AEO) Before It Goes Ex-Dividend?

Simply Wall St

American Eagle Outfitters, Inc. (NYSE:AEO) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 10th of October to receive the dividend, which will be paid on the 25th of October.

American Eagle Outfitters's next dividend payment will be US$0.1 per share, on the back of last year when the company paid a total of US$0.6 to shareholders. Calculating the last year's worth of payments shows that American Eagle Outfitters has a trailing yield of 3.7% on the current share price of $14.88. If you buy this business for its dividend, you should have an idea of whether American Eagle Outfitters's dividend is reliable and sustainable. So we need to investigate whether American Eagle Outfitters can afford its dividend, and if the dividend could grow.

View our latest analysis for American Eagle Outfitters

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. American Eagle Outfitters paid out a comfortable 36% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 39% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NYSE:AEO Historical Dividend Yield, October 5th 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see American Eagle Outfitters has grown its earnings rapidly, up 29% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, American Eagle Outfitters has increased its dividend at approximately 3.2% a year on average. Earnings per share have been growing much quicker than dividends, potentially because American Eagle Outfitters is keeping back more of its profits to grow the business.

The Bottom Line

Is American Eagle Outfitters an attractive dividend stock, or better left on the shelf? American Eagle Outfitters has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Overall we think this is an attractive combination and worthy of further research.

Curious what other investors think of American Eagle Outfitters? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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 editorial-team@simplywallst.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.