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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Franklin Electric Co., Inc. (NASDAQ:FELE) is about to go ex-dividend in just four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Franklin Electric investors that purchase the stock on or after the 4th of August will not receive the dividend, which will be paid on the 19th of August.
The company's upcoming dividend is US$0.17 a share, following on from the last 12 months, when the company distributed a total of US$0.70 per share to shareholders. Looking at the last 12 months of distributions, Franklin Electric has a trailing yield of approximately 0.9% on its current stock price of $80.73. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Franklin Electric 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. Franklin Electric has a low and conservative payout ratio of just 23% of its income after tax. A useful secondary check can be to evaluate whether Franklin Electric generated enough free cash flow to afford its dividend. The good news is it paid out just 18% of its free cash flow in the last year.
It's positive to see that Franklin Electric'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?
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 earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Franklin Electric's earnings per share have risen 13% per annum over the last five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Franklin Electric has increased its dividend at approximately 10% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Is Franklin Electric an attractive dividend stock, or better left on the shelf? Franklin Electric 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.
So while Franklin Electric looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 1 warning sign for Franklin Electric and you should be aware of it before buying any shares.
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.
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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