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Should Income Investors Look At Eaton Corporation plc (NYSE:ETN) Before Its Ex-Dividend?

Simply Wall St
·3-min read

Eaton Corporation plc (NYSE:ETN) is about to trade ex-dividend in the next four days. You will need to purchase shares before the 5th of November to receive the dividend, which will be paid on the 20th of November.

Eaton's upcoming dividend is US$0.73 a share, following on from the last 12 months, when the company distributed a total of US$2.92 per share to shareholders. Last year's total dividend payments show that Eaton has a trailing yield of 2.8% on the current share price of $103.79. If you buy this business for its dividend, you should have an idea of whether Eaton's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View 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. It paid out 77% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 45% of its free cash flow in the past year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Eaton's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Eaton has lifted its dividend by approximately 11% a year on average.

Final Takeaway

Is Eaton worth buying for its dividend? We're not enthused by the flat earnings per share, although at least the company's payout ratio is within reasonable bounds. Additionally, it paid out a lower percentage of its free cash flow, so at least it generated more cash than it spent on dividends. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Eaton's dividend merits.

However if you're still interested in Eaton as a potential investment, you should definitely consider some of the risks involved with Eaton. Case in point: We've spotted 2 warning signs for Eaton you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.