It looks like Rockwell Automation, Inc. (NYSE:ROK) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 8th of November will not receive this dividend, which will be paid on the 10th of December.
Rockwell Automation's next dividend payment will be US$1.0 per share, on the back of last year when the company paid a total of US$3.9 to shareholders. Based on the last year's worth of payments, Rockwell Automation stock has a trailing yield of around 2.3% on the current share price of $177.7. 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 check whether the dividend payments are covered, and if earnings are growing.
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. Rockwell Automation paid out a comfortable 44% of its profit last year. A useful secondary check can be to evaluate whether Rockwell Automation generated enough free cash flow to afford its dividend. Over the last year it paid out 50% of its free cash flow as dividends, within the usual range for most companies.
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.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Rockwell Automation, with earnings per share up 9.7% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Rockwell Automation has delivered an average of 13% per year annual increase in its dividend, based on the past ten years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is Rockwell Automation an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest, and it's interesting that Rockwell Automation is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. All things considered, we are not particularly enthused about Rockwell Automation from a dividend perspective.
Ever wonder what the future holds for Rockwell Automation? See what the 22 analysts we track 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.
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