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Eaton Corporation plc (NYSE:ETN) stock is about to trade ex-dividend in 4 days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least one business day to settle. Meaning, you will need to purchase Eaton's shares before the 5th of May to receive the dividend, which will be paid on the 23rd of May.
The company's next dividend payment will be US$1.04 per share. Last year, in total, the company distributed US$3.76 to shareholders. Calculating the last year's worth of payments shows that Eaton has a trailing yield of 1.4% on the current share price of US$290.69. 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! So we need to check whether the dividend payments are covered, and if earnings are 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. Eaton paid out a comfortable 39% of its profit last year. A useful secondary check can be to evaluate whether Eaton generated enough free cash flow to afford its dividend. Fortunately, it paid out only 43% 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.
See our latest analysis for Eaton
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Eaton's earnings per share have been growing at 13% a year for the past five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.