Methode Electronics, Inc. (NYSE:MEI) stock is about to trade ex-dividend in 3 days time. Investors can purchase shares before the 16th of January in order to be eligible for this dividend, which will be paid on the 31st of January.
Methode Electronics’s upcoming dividend is US$0.11 a share, following on from the last 12 months, when the company distributed a total of US$0.44 per share to shareholders. Last year’s total dividend payments show that Methode Electronics has a trailing yield of 1.1% on the current share price of $38.66. If you buy this business for its dividend, you should have an idea of whether Methode Electronics’s dividend is reliable and sustainable. So we need to investigate whether Methode Electronics can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Methode Electronics
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. Methode Electronics has a low and conservative payout ratio of just 16% of its income after tax. 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. The good news is it paid out just 19% of its free cash flow in the last year.
It’s positive to see that Methode Electronics’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.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Methode Electronics earnings per share are up 2.1% per annum over the last five years. Growth has been anaemic. Yet with more than 75% of its earnings being kept in the business, there is ample room to reinvest in growth or lift the payout ratio – either of which could increase the dividend.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, ten years ago, Methode Electronics has lifted its dividend by approximately 4.6% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Final Takeaway
Has Methode Electronics got what it takes to maintain its dividend payments? Earnings per share have been growing moderately, and Methode Electronics 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 Methode Electronics is being conservative with its dividend payouts and could still perform reasonably over the long run. There’s a lot to like about Methode Electronics, and we would prioritise taking a closer look at it.
Wondering what the future holds for Methode Electronics? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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.
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