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Is It Smart To Buy Eastman Chemical Company (NYSE:EMN) Before It Goes Ex-Dividend?

Simply Wall St

Readers hoping to buy Eastman Chemical Company (NYSE:EMN) 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 13th of March in order to receive the dividend, which the company will pay on the 3rd of April.

Eastman Chemical's next dividend payment will be US$0.66 per share. Last year, in total, the company distributed US$2.64 to shareholders. Based on the last year's worth of payments, Eastman Chemical stock has a trailing yield of around 4.6% on the current share price of $57.78. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Eastman Chemical can afford its dividend, and if the dividend could grow.

View our latest analysis for Eastman Chemical

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. Eastman Chemical paid out a comfortable 46% 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. Fortunately, it paid out only 32% of its free cash flow in the past year.

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:EMN Historical Dividend Yield, March 8th 2020

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Eastman Chemical's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Eastman Chemical has delivered an average of 12% per year annual increase in its dividend, based on the past ten years of dividend payments.

Final Takeaway

Should investors buy Eastman Chemical for the upcoming dividend? Earnings per share have been flat over this time, but we're intrigued to see that Eastman Chemical is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine strong earnings per share growth with a low payout ratio, and Eastman Chemical is halfway there. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Eastman Chemical has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Eastman Chemical has 2 warning signs we think you should be aware of.

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.

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.

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. Thank you for reading.