Don't Buy The Estée Lauder Companies Inc. (NYSE:EL) For Its Next Dividend Without Doing These Checks

The Estée Lauder Companies Inc. (NYSE:EL) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Estée Lauder Companies' shares before the 2nd of September in order to receive the dividend, which the company will pay on the 16th of September.

The company's upcoming dividend is US$0.35 a share, following on from the last 12 months, when the company distributed a total of US$1.40 per share to shareholders. Calculating the last year's worth of payments shows that Estée Lauder Companies has a trailing yield of 1.5% on the current share price of US$92.61. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Estée Lauder Companies paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Estée Lauder Companies didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. The company paid out 92% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

See our latest analysis for Estée Lauder Companies

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Estée Lauder Companies reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Estée Lauder Companies has lifted its dividend by approximately 3.8% a year on average.

We update our analysis on Estée Lauder Companies every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Is Estée Lauder Companies worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Estée Lauder Companies.

With that in mind though, if the poor dividend characteristics of Estée Lauder Companies don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 2 warning signs for Estée Lauder Companies (1 makes us a bit uncomfortable!) that you ought to be aware of before buying the shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.