Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Pentair plc (NYSE:PNR) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 21st of January in order to receive the dividend, which the company will pay on the 5th of February.
Pentair's next dividend payment will be US$0.20 per share, on the back of last year when the company paid a total of US$0.76 to shareholders. Looking at the last 12 months of distributions, Pentair has a trailing yield of approximately 1.4% on its current stock price of $57.59. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Pentair's payout ratio is modest, at just 35% of profit. A useful secondary check can be to evaluate whether Pentair generated enough free cash flow to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.
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.
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 earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Pentair earnings per share are up 2.9% per annum over the last five years. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Pentair has lifted its dividend by approximately 0.5% a year on average.
The Bottom Line
Should investors buy Pentair for the upcoming dividend? Earnings per share growth has been growing somewhat, and Pentair is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Pentair is halfway there. Overall we think this is an attractive combination and worthy of further research.
While it's tempting to invest in Pentair for the dividends alone, you should always be mindful of the risks involved. For example - Pentair has 1 warning sign we think you should be aware of.
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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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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