Should You Buy The Eastern Company (NASDAQ:EML) For Its Upcoming Dividend?

Readers hoping to buy The Eastern Company (NASDAQ:EML) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 26th of February to receive the dividend, which will be paid on the 15th of March.

Eastern's next dividend payment will be US$0.11 per share, and in the last 12 months, the company paid a total of US$0.44 per share. Last year's total dividend payments show that Eastern has a trailing yield of 1.7% on the current share price of $25.9. 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.

Check out our latest analysis for Eastern

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see Eastern paying out a modest 31% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 13% of its free cash flow as dividends last year, which is conservatively low.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Eastern paid out over the last 12 months.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Eastern, with earnings per share up 3.2% on average over the last five years. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Eastern has lifted its dividend by approximately 2.0% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Should investors buy Eastern for the upcoming dividend? Earnings per share have been growing moderately, and Eastern 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 Eastern is halfway there. It's a promising combination that should mark this company worthy of closer attention.

So while Eastern looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - Eastern has 3 warning signs we think you should be aware of.

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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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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