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Why It Might Not Make Sense To Buy Ethan Allen Interiors Inc. (NYSE:ETH) For Its Upcoming Dividend

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Simply Wall St
·4 min read
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Ethan Allen Interiors Inc. (NYSE:ETH) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 8th of April in order to receive the dividend, which the company will pay on the 23rd of April.

Ethan Allen Interiors's next dividend payment will be US$0.21 per share, on the back of last year when the company paid a total of US$0.84 to shareholders. Last year's total dividend payments show that Ethan Allen Interiors has a trailing yield of 9.4% on the current share price of $8.92. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Ethan Allen Interiors

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. Its dividend payout ratio is 83% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. 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. Dividends consumed 60% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Ethan Allen Interiors'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.

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

NYSE:ETH Historical Dividend Yield April 3rd 2020
NYSE:ETH Historical Dividend Yield April 3rd 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Ethan Allen Interiors's 8.2% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Ethan Allen Interiors has delivered 15% dividend growth per year on average over the past ten years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Ethan Allen Interiors is already paying out 83% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Should investors buy Ethan Allen Interiors for the upcoming dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Ethan Allen Interiors despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for Ethan Allen Interiors you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.