Readers hoping to buy The Eastern Company (NASDAQ:EML) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend.  The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment.  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.   Meaning, you will need to purchase Eastern's shares before the 14th of May to receive the dividend, which will be paid on the 17th of June.  

The company's upcoming dividend is US$0.11 a share, following on from the last 12 months, when the company distributed a total of US$0.44 per share to shareholders.  Last year's total dividend payments show that Eastern has a trailing yield of 1.5% on the current share price of US$29.15.    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!  We need to see whether the dividend is covered by earnings and if it's growing.

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.   Fortunately Eastern's payout ratio is modest, at just 28% 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.     The good news is it paid out just 17% of its free cash flow in the last year.    

It's positive to see that Eastern'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 how much of its profit Eastern paid out over the last 12 months.

NasdaqGM:EML Historic Dividend May 10th 2024

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely.   If earnings fall far enough, the company could be forced to cut its dividend.     With that in mind, we're discomforted by Eastern's 7.2% per annum decline in earnings in the past five years.  Such a sharp decline casts doubt on the future sustainability of the dividend.      

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth.     It looks like the Eastern dividends are largely the same as they were 10 years ago.   If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.      

To Sum It Up

From a dividend perspective, should investors buy or avoid Eastern?      Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut.        In summary, while it has some positive characteristics, we're not inclined to race out and buy Eastern today.  

So while Eastern looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock.     For example, we've found 1 warning sign for Eastern that we recommend you consider before investing in the business.  

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.