Here's Why We're Wary Of Buying Espey Mfg. & Electronics' (NYSEMKT:ESP) For Its Upcoming Dividend

It looks like Espey Mfg. & Electronics Corp. (NYSEMKT:ESP) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 21st of December, you won't be eligible to receive this dividend, when it is paid on the 29th of December.

Espey Mfg. & Electronics's next dividend payment will be US$0.25 per share, and in the last 12 months, the company paid a total of US$1.00 per share. Looking at the last 12 months of distributions, Espey Mfg. & Electronics has a trailing yield of approximately 4.8% on its current stock price of $20.88. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Espey Mfg. & Electronics has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Espey Mfg. & Electronics

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Espey Mfg. & Electronics distributed an unsustainably high 188% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 52% of its free cash flow as dividends, within the usual range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Espey Mfg. & Electronics fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Espey Mfg. & Electronics paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Espey Mfg. & Electronics's earnings per share have dropped 18% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Espey Mfg. & Electronics has seen its dividend decline 6.2% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Has Espey Mfg. & Electronics got what it takes to maintain its dividend payments? Earnings per share have been shrinking in recent times. What's more, Espey Mfg. & Electronics is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think Espey Mfg. & Electronics is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Espey Mfg. & Electronics as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 5 warning signs for Espey Mfg. & Electronics (of which 1 can't be ignored!) you should know about.

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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