Is Carpenter Technology Corporation (NYSE:CRS) A Smart Pick For Income Investors?
Today we’ll take a closer look at Carpenter Technology Corporation (NYSE:CRS) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, Carpenter Technology likely looks attractive to investors, given its 3.9% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Remember though, given the recent drop in its share price, Carpenter Technology’s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
Explore this interactive chart for our latest analysis on Carpenter Technology!
NYSE:CRS Historical Dividend Yield April 15th 2020
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Carpenter Technology paid out 21% of its profit as dividends. We’d say its dividends are thoroughly covered by earnings.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Carpenter Technology paid out 260% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. While Carpenter Technology’s dividends were covered by the company’s reported profits, free cash flow is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Carpenter Technology’s ability to maintain its dividend.
Remember, you can always get a snapshot of Carpenter Technology’s latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Carpenter Technology has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.72 in 2010, compared to US$0.80 last year. Dividends per share have grown at approximately 1.1% per year over this time.
Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Earnings have grown at around 8.4% a year for the past five years, which is better than seeing them shrink! With a decent amount of growth and a low payout ratio, we think this bodes well for Carpenter Technology’s prospects of growing its dividend payments in the future.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, the company has a conservative payout ratio, although we’d note that its cashflow in the past year was substantially lower than its reported profit. Next, growing earnings per share and steady dividend payments is a great combination. Carpenter Technology has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we’ve identified 3 warning signs for Carpenter Technology (1 is concerning!) that you should be aware of before investing.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
