Should You Buy Flowserve Corporation (NYSE:FLS) For Its Dividend?

Could Flowserve Corporation (NYSE:FLS) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A slim 2.0% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Flowserve could have potential. The company also returned around 0.9% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying Flowserve for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Flowserve!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 70% of Flowserve's profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Of the free cash flow it generated last year, Flowserve paid out 48% as dividends, suggesting the dividend is affordable. It's positive to see that Flowserve'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.

We update our data on Flowserve every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. Flowserve has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was US$0.4 in 2011, compared to US$0.8 last year. Dividends per share have grown at approximately 7.5% per year over this time.

Businesses that can grow their dividends at a decent rate and maintain a stable payout can generate substantial wealth for shareholders over the long term.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Flowserve's earnings per share have shrunk at 16% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Flowserve's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Flowserve's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Flowserve has an acceptable payout ratio and its dividend is well covered by cashflow. It's not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. In sum, we find it hard to get excited about Flowserve from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for Flowserve (1 can't be ignored!) that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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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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