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There's A Lot To Like About eBay Inc.'s (NASDAQ:EBAY) Upcoming US$0.16 Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that eBay Inc. (NASDAQ:EBAY) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 28th of February will not receive the dividend, which will be paid on the 20th of March.

eBay's next dividend payment will be US$0.16 per share, and in the last 12 months, the company paid a total of US$0.64 per share. Based on the last year's worth of payments, eBay stock has a trailing yield of around 1.7% on the current share price of $38.2. If you buy this business for its dividend, you should have an idea of whether eBay's dividend is reliable and sustainable. So we need to investigate whether eBay can afford its dividend, and if the dividend could grow.

View our latest analysis for eBay

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately eBay's payout ratio is modest, at just 27% of profit. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 18% of its cash flow last 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.

NasdaqGS:EBAY Historical Dividend Yield, February 23rd 2020
NasdaqGS:EBAY Historical Dividend Yield, February 23rd 2020

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we're not overly excited about eBay's flat earnings 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. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Unfortunately eBay has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

To Sum It Up

Is eBay worth buying for its dividend? Earnings per share have been flat over this time, but we're intrigued to see that eBay is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. Generally we like to see both low payout ratios and strong earnings per share growth, but eBay is halfway there. There's a lot to like about eBay, and we would prioritise taking a closer look at it.

Wondering what the future holds for eBay? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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