Eaton Corporation (ETN): Manufacturing Safe Dividends Since 1923

Dividend Analysis: Eaton

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Eaton’s long-term dividend and fundamental data charts can all be seen by clicking here.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Eaton’s Dividend Safety Score of 53 is about average. Despite difficult business trends in recent quarters, Eaton has maintained healthy dividend payout ratios near 50%.

The company’s payout ratios have more than doubled over the last decade (see below), but there is still plenty of cushion for Eaton to continue paying its dividend from operating earnings and cash flow if unexpectedly difficult times were to hit.

Source: Simply Safe Dividends

We also evaluate how a company performed during the last recession to assess the safety of its dividend. Eaton’s sales fell by 19% during fiscal year 2009, and its stock also dropped by 47% in 2008 to trail the S&P 500 by 10%.

Not surprisingly, Eaton’s business is sensitive to the economy and should be operated more conservatively than other types of businesses that are less cyclical.

Despite ever-changing macro conditions, Eaton’s free cash flow generation has been nothing short of excellent. As seen below, the company has generated positive free cash flow in each of the last 10 years, providing it with flexibility to pay down debt, increase the dividend, make opportunistic acquisitions, and repurchase shares.

Observing a company’s operating margins also helps assess dividend safety. Generally speaking, the safest companies will earn high and stable margins.

Aside from the financial crisis, Eaton has earned very consistent operating margins between 8% and 10%. The business has done a great job delivering steady profits in numerous environments.