Ennis, Inc. (NYSE:EBF) has announced that it will be increasing its dividend on the 9th of August to US$0.25, which will be 11% higher than last year. This takes the dividend yield from 4.3% to 4.4%, which shareholders will be pleased with.
Ennis Doesn't Earn Enough To Cover Its Payments
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, the company was paying out 97% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 48%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Looking forward, EPS could fall by 5.9% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 112%, which is definitely a bit high to be sustainable going forward.
Ennis Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was US$0.62 in 2011, and the most recent fiscal year payment was US$0.90. This works out to be a compound annual growth rate (CAGR) of approximately 3.8% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Dividend Growth Is Doubtful
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, initial appearances might be deceiving. It's not great to see that Ennis' earnings per share has fallen at approximately 5.9% per year over the past five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.
Our Thoughts On Ennis' Dividend
Overall, we always like to see the dividend being raised, but we don't think Ennis will make a great income stock. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Ennis is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Ennis that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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