Readers hoping to buy Escalade, Incorporated (NASDAQ:ESCA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 11th of September to receive the dividend, which will be paid on the 21st of September.
Escalade’s upcoming dividend is US$0.14 a share, following on from the last 12 months, when the company distributed a total of US$0.50 per share to shareholders. Last year’s total dividend payments show that Escalade has a trailing yield of 2.8% on the current share price of $17.98. 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.
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. Escalade paid out a comfortable 45% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 23% of its free cash flow as dividends last year, which is conservatively low.
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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re encouraged by the steady growth at Escalade, with earnings per share up 2.8% on average over the last five years. Earnings per share growth in recent times has not been a standout. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Escalade has increased its dividend at approximately 17% a year on average. 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.
To Sum It Up
Should investors buy Escalade for the upcoming dividend? Earnings per share have been growing moderately, and Escalade is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Escalade is being conservative with its dividend payouts and could still perform reasonably over the long run. Escalade looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
On that note, you’ll want to research what risks Escalade is facing. To help with this, we’ve discovered 1 warning sign for Escalade that you should be aware of before investing in their shares.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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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