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 TE Connectivity Ltd. (NYSE:TEL) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 20th of February, you won’t be eligible to receive this dividend, when it is paid on the 6th of March.
TE Connectivity’s next dividend payment will be US$0.46 per share, on the back of last year when the company paid a total of US$1.84 to shareholders. Looking at the last 12 months of distributions, TE Connectivity has a trailing yield of approximately 2.0% on its current stock price of $93.3. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether TE Connectivity has been able to grow its dividends, or if the dividend might be cut.
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. TE Connectivity paid out a comfortable 39% of its profit last year. 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. Fortunately, it paid out only 34% of its free cash flow in the past year.
It’s positive to see that TE Connectivity’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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. 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 TE Connectivity, with earnings per share up 3.7% on average over the last five years. Recent growth has not been impressive. 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. TE Connectivity has delivered an average of 11% per year annual increase in its dividend, based on the past ten years of dividend payments. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Is TE Connectivity an attractive dividend stock, or better left on the shelf? Earnings per share have been growing moderately, and TE Connectivity 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. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and TE Connectivity is halfway there. It’s a promising combination that should mark this company worthy of closer attention.
Wondering what the future holds for TE Connectivity? See what the 17 analysts we track 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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