Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see The Estée Lauder Companies Inc. (NYSE:EL) is about to trade ex-dividend in the next three 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Estée Lauder Companies investors that purchase the stock on or after the 29th of November will not receive the dividend, which will be paid on the 15th of December.
The company's upcoming dividend is US$0.60 a share, following on from the last 12 months, when the company distributed a total of US$2.40 per share to shareholders. Calculating the last year's worth of payments shows that Estée Lauder Companies has a trailing yield of 0.7% on the current share price of $349.21. 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.
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. Fortunately Estée Lauder Companies's payout ratio is modest, at just 25% of profit. A useful secondary check can be to evaluate whether Estée Lauder Companies generated enough free cash flow to afford its dividend. It distributed 31% of its free cash flow as dividends, a comfortable payout level for most companies.
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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Estée Lauder Companies has grown its earnings rapidly, up 23% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Estée Lauder Companies has delivered 20% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
Is Estée Lauder Companies an attractive dividend stock, or better left on the shelf? It's great that Estée Lauder Companies is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. It's a promising combination that should mark this company worthy of closer attention.
So while Estée Lauder Companies looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To help with this, we've discovered 1 warning sign for Estée Lauder Companies that you should be aware of before investing in their shares.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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.
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