Eastman Chemical Company (NYSE:EMN) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 13th of March will not receive the dividend, which will be paid on the 3rd of April.
Eastman Chemical’s next dividend payment will be US$0.66 per share, and in the last 12 months, the company paid a total of US$2.64 per share. Based on the last year’s worth of payments, Eastman Chemical has a trailing yield of 4.6% on the current stock price of $57.78. If you buy this business for its dividend, you should have an idea of whether Eastman Chemical’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That’s why it’s good to see Eastman Chemical paying out a modest 46% of its earnings. 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. It distributed 32% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s positive to see that Eastman Chemical’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.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. 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 not enthused to see that Eastman Chemical’s earnings per share have remained effectively flat over the past five years. It’s better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Recent earnings growth has been limited. 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. Eastman Chemical has delivered an average of 12% per year annual increase in its dividend, based on the past ten years of dividend payments.
To Sum It Up
Is Eastman Chemical an attractive dividend stock, or better left on the shelf? Earnings per share have been flat over this time, but we’re intrigued to see that Eastman Chemical is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. Generally we like to see both low payout ratios and strong earnings per share growth, but Eastman Chemical is halfway there. There’s a lot to like about Eastman Chemical, and we would prioritise taking a closer look at it.
While it’s tempting to invest in Eastman Chemical for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 2 warning signs for Eastman Chemical and you should be aware of them before buying any shares.
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.
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