It looks like Avery Dennison Corporation (NYSE:AVY) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 3rd of March in order to be eligible for this dividend, which will be paid on the 18th of March.
Avery Dennison’s next dividend payment will be US$0.58 per share. Last year, in total, the company distributed US$2.32 to shareholders. Looking at the last 12 months of distributions, Avery Dennison has a trailing yield of approximately 1.9% on its current stock price of $119.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. Avery Dennison paid out 63% of its earnings to investors last year, a normal payout level for most businesses. 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. Thankfully its dividend payments took up just 39% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Avery Dennison’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?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it’s a relief to see Avery Dennison earnings per share are up 6.3% per annum over the last five years. Decent historical earnings per share growth suggests Avery Dennison has been effectively growing value for shareholders. However, it’s now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we’d take this as a tacit signal that the company’s growth prospects are slowing.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, Avery Dennison has lifted its dividend by approximately 3.5% 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.
From a dividend perspective, should investors buy or avoid Avery Dennison? While earnings per share growth has been modest, Avery Dennison’s dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Avery Dennison’s dividend merits.
Ever wonder what the future holds for Avery Dennison? See what the 13 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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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