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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see American Eagle Outfitters, Inc. (NYSE:AEO) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase American Eagle Outfitters' shares on or after the 8th of July will not receive the dividend, which will be paid on the 23rd of July.
The company's next dividend payment will be US$0.18 per share. Last year, in total, the company distributed US$0.55 to shareholders. Calculating the last year's worth of payments shows that American Eagle Outfitters has a trailing yield of 1.9% on the current share price of $37.44. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for American Eagle Outfitters
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. American Eagle Outfitters is paying out just 16% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Luckily it paid out just 16% of its free cash flow last year.
It's positive to see that American Eagle Outfitters'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?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. So we're not too excited that American Eagle Outfitters's earnings are down 4.7% a year over the past five years.