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 Fortune Brands Home & Security, Inc. (NYSE:FBHS) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 27th of November in order to be eligible for this dividend, which will be paid on the 18th of December.
Fortune Brands Home & Security’s next dividend payment will be US$0.22 per share, on the back of last year when the company paid a total of US$0.88 to shareholders. Calculating the last year’s worth of payments shows that Fortune Brands Home & Security has a trailing yield of 1.4% on the current share price of $62.56. If you buy this business for its dividend, you should have an idea of whether Fortune Brands Home & Security’s dividend is reliable and sustainable. 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. Fortune Brands Home & Security paid out a comfortable 29% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Luckily it paid out just 25% of its free cash flow last 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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we’re glad to see Fortune Brands Home & Security’s earnings per share have risen 19% 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. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Fortune Brands Home & Security has delivered an average of 12% per year annual increase in its dividend, based on the past seven years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
The Bottom Line
Has Fortune Brands Home & Security got what it takes to maintain its dividend payments? We love that Fortune Brands Home & Security is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Fortune Brands Home & Security looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
Curious what other investors think of Fortune Brands Home & Security? See what analysts 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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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