The Eastern Company (NASDAQ:EML) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 28th of February, you won’t be eligible to receive this dividend, when it is paid on the 16th of March.
Eastern’s next dividend payment will be US$0.11 per share. Last year, in total, the company distributed US$0.44 to shareholders. Based on the last year’s worth of payments, Eastern stock has a trailing yield of around 1.6% on the current share price of $27.75. 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. Eastern paid out just 22% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. What’s good is that dividends were well covered by free cash flow, with the company paying out 18% of its cash flow last year.
It’s positive to see that Eastern’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 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. For this reason, we’re glad to see Eastern’s earnings per share have risen 13% per annum over the last five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Eastern has delivered 2.0% dividend growth per year on average over the past ten years. Earnings per share have been growing much quicker than dividends, potentially because Eastern is keeping back more of its profits to grow the business.
To Sum It Up
Is Eastern an attractive dividend stock, or better left on the shelf? Eastern has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There’s a lot to like about Eastern, and we would prioritise taking a closer look at it.
Want to learn more about Eastern’s dividend performance? Check out this visualisation of its historical revenue and earnings growth.
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.
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