The Eastern Company (NASDAQ:EML) is about to trade ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 16th of August will not receive the dividend, which will be paid on the 16th of September.
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. Calculating the last year’s worth of payments shows that Eastern has a trailing yield of 1.9% on the current share price of $23.71. If you buy this business for its dividend, you should have an idea of whether Eastern’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. 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. The good news is it paid out just 23% of its free cash flow in the 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see Eastern’s earnings per share have risen 12% per annum over the last five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Eastern has lifted its dividend by approximately 2.0% a year on average. It’s good to see both earnings and the dividend have improved – although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Is Eastern worth buying for its dividend? 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. It’s a promising combination that should mark this company worthy of closer attention.
Want to learn more about Eastern? Here’s a visualisation of its historical rate of revenue and earnings growth.
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