Eaton Stock: Dividend Trends in Numbers (NYSE: ETN)
If we look at a long term chart of Eaton Corporation plc (NYSE: ETN), we can see that the stocks just issued a sell signal via the MACD crossover. What makes this technical indicator remarkable (especially on monthly charts) is the fact that it is a combination of momentum and trend. Suffice it to say, what we currently have at Eaton Corporation are overbought stocks (significant distance above the zero line) and a moving average bearish crossover. Consensus calls for earnings per share of $1.60 for the first quarter, so it will be interesting to see if the downward pull intensifies if indeed that figure is not met.
To see if this sell signal is indeed valid, we can look at Eaton’s main financial indicators that make up its dividend. Dividends are important to investors because a sustainably growing payout promotes confidence in future growth. In fact, given the current inflationary environment, rarely has an investment’s “total return” been as important as it is in today’s market.
Eaton’s dividend yield is currently 2.12%, just over 17% above its 5-year average yield of 2.56%. The below-average return is consistent with what we’re seeing in the overbought techniques currently at Eaton’s. With Eaton’s current dividend yield trailing inflation, it is imperative that stocks continue from current levels to protect purchasing power. The remaining dividend metrics can give us some insight into whether this will perform very well.
As we can see below, average annual dividend growth rates at Eaton’s have been declining for some time now. While the average annual growth rate over 5 years stands at 6.2%, the equivalent growth rate over 12 months has fallen to 4.1%.
|Time range||12 months||3 years||5 years||10 years|
|ETN Average annual growth rate of dividends||4.1%||4.8%||6.2%||8.4%|
$1.219 billion in dividends have been paid to shareholders over the past 12 months from free cash flow of $1.588 billion. This gives a dividend payout ratio of 76%. Free cash flow is comprised of operating cash flow less capital expenditures. It must be said that a payout ratio of 76% is rather high, especially when comparing the current number to the 5-year average (51.37%). Moreover, the increase in the payout ratio certainly explains in part why dividend growth has declined in recent years.
In saying that, what we have discussed so far is retrospective in nature. Going forward, by monitoring Eaton’s trends in its leverage ratio, interest coverage ratio, as well as projected earnings growth, it is possible to determine whether the current payout ratio of 76 % may, in fact, drop from its current level. level.
Rate of endettement
At the end of the last quarter, shareholders’ equity was $16.41 billion and interest-bearing debt was $8.58 billion. This means that Eaton’s debt ratio is 0.52. Although the debt load may seem high at first glance, Eaton’s made more than $2.1 billion in net income last year and generated more or less the same operating cash flow figure. This means that four years of income would be enough to pay off the company’s interest-bearing debt. Additionally, net income, along with cash flow, is expected to grow by around 15% in fiscal 2022, so the ammunition should definitely be there to keep debt in check.
Interest coverage ratio
To see the impact of Eaton’s debt on its finances, we go to the income statement where we calculate the interest coverage ratio. The less money as a percentage that comes out of Eaton’s earnings over time, the more money is left over in dividend payments to shareholders. In fiscal 2021, interest expense was $144 million. This gives us an interest coverage ratio of 17.1, which is well above the figure of 12.7 at the end of fiscal 2020.
Projected earnings growth
As mentioned, at this time (April 25), net income and cash flow are expected to increase by approximately 15% in fiscal 2022. This trend alone, along with the trend discussed above , seems reason enough to continue to average dollar cost in Eaton’s even if sales were to pick up. The only small bone of contention would be the recent earnings revisions for the first and second quarters of fiscal 2022. Although EPS estimates of $1.60 and $1.84 are 11% and 9% higher than the same net figures for the first and second quarters of fiscal 2020, the consensus has slightly reduced their expectations for these periods in recent weeks.
Is the market reading this given the monthly MACD crossover alluded to earlier? I bring this up because often in the early stages of a major trend reversal, many do not understand why stocks are trading a certain way. Shares are currently trading at nearly 23 times forward GAAP earnings, so stocks, from a valuation perspective, are by no means cheap at this point.
In terms of the basic financial metrics that make up Eaton’s dividend, the payout is sustainable, but some trends are worth watching. The cash flow payout ratio has increased somewhat lately, which has led to a slowdown in the growth rate of dividends. Additionally, EPS revisions have declined slightly over the next several quarters, which is unnecessary given Eaton’s current valuation. However, Eaton continues to manage a strong balance sheet where interest expense still represents only a fraction of operating profit. Long investors must decide (if the selloff continues) to continue reinvesting dividends in the stock to reduce their cost basis. We look forward to continued coverage.