It looks like Masco Corporation (NYSE:MAS) is about to go ex-dividend in the next 4 days. You can purchase shares before the 10th of October in order to receive the dividend, which the company will pay on the 12th of November.
Masco's upcoming dividend is US$0.1 a share, following on from the last 12 months, when the company distributed a total of US$0.5 per share to shareholders. Based on the last year's worth of payments, Masco has a trailing yield of 1.1% on the current stock price of $42.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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. Masco is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Masco generated enough free cash flow to afford its dividend. The good news is it paid out just 18% of its free cash flow in the last year.
It's positive to see that Masco'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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Masco has grown its earnings rapidly, up 28% a year for the past five years. Masco earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Masco's dividend payments per share have declined at 6.5% per year on average over the past ten years, which is uninspiring. Masco is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Has Masco got what it takes to maintain its dividend payments? It's great that Masco 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.
Wondering what the future holds for Masco? See what the 16 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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