Could Franklin Electric Co., Inc. (NASDAQ:FELE) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
While Franklin Electric’s 1.1% dividend yield is not the highest, we think its lengthy payment history is quite interesting. The company also bought back stock equivalent to around 1.0% of market capitalisation this year. Some simple analysis can offer a lot of insight when buying a company for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 21% of Franklin Electric’s profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Franklin Electric’s cash payout ratio last year was 21%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.
Consider getting our latest analysis on Franklin Electric’s financial position here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Franklin Electric’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.25 in 2009, compared to US$0.58 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.8% a year over that time.
Dividend Growth Potential
While dividend payments have been relatively stable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Franklin Electric has grown its earnings per share at 5.8% per annum over the past five years. A low payout ratio and strong historical earnings growth suggests Franklin Electric has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, we like that Franklin Electric has low and conservative payout ratios. Second, earnings growth has been mediocre, but at least the dividends have been relatively stable. Franklin Electric performs well under this analysis, although it falls slightly short in some key areas. At the right valuation though, it may still be an interesting prospect.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 5 analysts we track are forecasting for Franklin Electric for free with public analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.