It looks like Powell Industries, Inc. (NASDAQ:POWL) is about to go ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 20th of August will not receive the dividend, which will be paid on the 18th of September.
Powell Industries’s next dividend payment will be US$0.26 per share, on the back of last year when the company paid a total of US$1.04 to shareholders. Based on the last year’s worth of payments, Powell Industries stock has a trailing yield of around 2.8% on the current share price of $37.06. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. An unusually high payout ratio of 246% of its profit suggests something is happening other than the usual distribution of profits to shareholders. 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 distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s good to see that while Powell Industries’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Powell Industries’s earnings have collapsed faster than Wile E Coyote’s schemes to trap the Road Runner; down a tremendous 34% a year over the past five years.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Powell Industries has delivered 0.7% dividend growth per year on average over the past 6 years.
To Sum It Up
Is Powell Industries worth buying for its dividend? It’s not a great combination to see a company with earnings in decline and paying out 246% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mis-match between income and cashflow. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.
Curious what other investors think of Powell Industries? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
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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