Franklin Electric Co., Inc. (NASDAQ:FELE) Looks Interesting, And It's About To Pay A Dividend

Franklin Electric Co., Inc. (NASDAQ:FELE) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves a full business day. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Franklin Electric's shares on or after the 6th of November will not receive the dividend, which will be paid on the 20th of November.

The company's upcoming dividend is US$0.265 a share, following on from the last 12 months, when the company distributed a total of US$1.06 per share to shareholders. Based on the last year's worth of payments, Franklin Electric stock has a trailing yield of around 1.1% on the current share price of US$94.77. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

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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. Franklin Electric paid out just 8.1% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that Franklin Electric'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.

See our latest analysis for Franklin Electric

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Franklin Electric, with earnings per share up 9.1% on average over the last five years. Earnings per share have been growing at a decent rate, and the company is retaining more than three-quarters of its earnings in the business. If profits are reinvested effectively, this could be a bullish combination for future earnings and dividends.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Franklin Electric has increased its dividend at approximately 11% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Franklin Electric? Earnings per share have been growing moderately, and Franklin Electric is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Franklin Electric is being conservative with its dividend payouts and could still perform reasonably over the long run. Overall we think this is an attractive combination and worthy of further research.

On that note, you'll want to research what risks Franklin Electric is facing. Our analysis shows 2 warning signs for Franklin Electric and you should be aware of these before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.