The Estée Lauder Companies Inc.’s (NYSE:EL) investors are due to receive a payment of $0.35 per share on 15th of December. The dividend yield is 1.6% based on this payment, which is a little bit low compared to the other companies in the industry.
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It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Even though Estée Lauder Companies isn’t generating a profit, it is generating healthy free cash flows that easily cover the dividend. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.
According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 44%, so there isn’t too much pressure on the dividend.
Check out our latest analysis for Estée Lauder Companies
The company’s dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of $0.96 in 2015 to the most recent total annual payment of $1.40. This implies that the company grew its distributions at a yearly rate of about 3.8% over that duration. It’s encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Estée Lauder Companies’ EPS has declined at around 48% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. It’s not all bad news though, as the earnings are predicted to rise over the next 12 months – we would just be a bit cautious until this becomes a long term trend.
In summary, while it’s good to see that the dividend hasn’t been cut, we are a bit cautious about Estée Lauder Companies’ payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn’t been great. Overall, we don’t think this company has the makings of a good income stock.