Is EnPro Industries, Inc. (NYSE:NPO) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
With a 1.6% yield and a five-year payment history, investors probably think EnPro Industries looks like a reliable dividend stock. A 1.6% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock equivalent to around 1.1% of market capitalisation this year. Some simple analysis can reduce the risk of holding EnPro Industries for its dividend, and we’ll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, EnPro Industries paid out 59% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. EnPro Industries paid out 15% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. 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.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. EnPro Industries has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.80 in 2014, compared to US$1.00 last year. Dividends per share have grown at approximately 4.6% per year over this time.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. EnPro Industries has grown its earnings per share at 4.7% per annum over the past five years. 4.7% per annum is not a particularly high rate of growth, which we find curious. If the company is struggling to grow, perhaps that’s why it elects to pay out more than half of its earnings to shareholders.
To summarise, shareholders should always check that EnPro Industries’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. EnPro Industries’s payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Unfortunately, there hasn’t been any earnings growth, and the company’s dividend history has been too short for us to evaluate the consistency of the dividend. Ultimately, EnPro Industries comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 EnPro Industries analysts we track are forecasting continued growth with our free report on 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%.
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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.