Eaton Corporation plc (NYSE:ETN) Stock Goes Ex-Dividend In Just Three Days
Eaton Corporation plc (NYSE:ETN) stock is about to trade ex-dividend in 3 days. This means that investors who purchase shares on or after the 13th of May will not receive the dividend, which will be paid on the 28th of May.
Eaton's next dividend payment will be US$0.76 per share, on the back of last year when the company paid a total of US$3.04 to shareholders. Looking at the last 12 months of distributions, Eaton has a trailing yield of approximately 2.1% on its current stock price of $147.52. If you buy this business for its dividend, you should have an idea of whether Eaton's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Eaton
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 82% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 48% of its free cash flow in the past year.
It's positive to see that Eaton's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. So we're not too excited that Eaton's earnings are down 3.3% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Eaton has delivered an average of 10% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Eaton is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Is Eaton an attractive dividend stock, or better left on the shelf? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. All things considered, we are not particularly enthused about Eaton from a dividend perspective.
So if you want to do more digging on Eaton, you'll find it worthwhile knowing the risks that this stock faces. Case in point: We've spotted 2 warning signs for Eaton 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.
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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