Last update on 2024-06-27

Encore Wire (WIRE) - Dividend Analysis (Final Score: 4/8)

Comprehensive Encore Wire (WIRE) Dividend Analysis, scoring 4/8. Evaluates dividend stability, yields against industry, growth rate, payout ratio, and more.

Short Analysis - Dividend Score: 4

We're running Encore Wire (WIRE) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Encore Wire (WIRE) has a dividend score of 4 out of 8. Here's a breakdown: the dividend yield is much lower than the industry average, having declined over the years, making it less attractive for income-focused investors. The company has a very low payout ratio of 4.94% over the past 20 years, which indicates a focus on reinvesting earnings into the business. Dividends are well-covered by earnings, suggesting financial stability. However, coverage by cash flow has been inconsistent, showcasing periods of both strength and weakness. Dividend payments have remained relatively stable since they started in 2007 but have not been paid for over 25 years. Finally, the company has consistently repurchased shares, which is a good sign for long-term investors.

Insights for Value Investors Seeking Stable Income

Given the analysis, Encore Wire seems more focused on growth rather than providing high dividend yields. While its low payout ratio and earnings coverage indicate financial health, the low and inconsistent dividend yield may not attract income-focused investors. However, the stock's massive appreciation and consistent share repurchases may appeal to growth investors. If you're looking for income through dividends, this might not be the best choice, but it's worth considering if you're interested in long-term growth and capital appreciation.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend Yield measures the annual dividend income an investor receives relative to the share price. It's used to assess the income-generating potential of an investment, as higher yields often indicate better returns.

Encore Wire's dividend yield of 0.0375% is significantly lower than the industry average of 0.97%. Over the past 20 years, Encore Wire's dividend yield has generally been sporadic and lower compared to industry peers. Notably, the highest yield was 0.5274% in 2004 while in recent years it's hovered near the 0.04-0.06% range. The consistent decline in dividend yield, particularly when juxtaposed with the industry average, suggests that Encore Wire has a limited focus on returning capital to shareholders via dividends. A declining trend in the yield, coupled with this year’s low, may indicate a shrinking attractiveness for income-focused investors. However, the significant appreciation in stock price from $11.9 in 2003 to $213.6 in 2023 highlights potential growth-focused returns rather than income through dividends.

Average annual Growth Rate higher than 5% in the last 20 years?

Explain what the dividend growth rate is and why it is important to consider.

Dividend growth rate refers to the annualized percentage rate of growth in the dividends paid by a company over a period of time. It is important because it reflects a company's ability to grow its dividends, which is often a sign of financial health and stability. A steady and growing dividend is attractive to income-focused investors.

Average annual Payout Ratio lower than 65% in the last 20 years?

The payout ratio is the percentage of earnings a company pays to its shareholders in the form of dividends. A lower payout ratio can be a sign that the company is reinvesting a large portion of its earnings back into the business, which might lead to growth.

The data reveals that Encore Wire (WIRE) has maintained a very low average payout ratio of about 4.94% over the past 20 years. This is significantly below the 65% threshold, suggesting that the company has focused primarily on reinvesting its earnings back into the business rather than distributing them as dividends. This trend is generally positive as it indicates that Encore Wire is prioritizing growth and sustainability over current income payouts. Additionally, the consistently low payout ratios across all years imply prudent financial management and a robust capability to withstand economic downturns.

Dividends Well Covered by Earnings?

A critical factor in dividend sustainability is whether the company's earnings adequately cover its dividend payments. This is often assessed by the dividend coverage ratio.

For Encore Wire (WIRE), examining the Earnings Per Share (EPS) versus Dividends Per Share (DPS) across the years reveals a generally healthy coverage of dividends by earnings. For example, in 2022, the EPS was an impressive $37.4676 while the DPS was a mere $0.08, yielding a dividend coverage ratio of around 0.0021, indicating that earnings far exceed dividend payments. This trend of high EPS compared to DPS ensures robust dividend sustainability and signifies an excellent buffer for Encore Wire to reliably deliver dividends in the future. Therefore, this is a favorable trend, showcasing financial health and prudent management.

Dividends Well Covered by Cash Flow?

Dividends being well covered by cash flow indicates that the company generates enough free cash flow to comfortably pay its dividends, which is important for sustainability.

Analyzing the ratios of dividend payments covered by cash flow, Encore Wire (WIRE) shows varying performance metrics from 2003 to 2023. In earlier years such as 2003 and 2005, free cash flow was negative, making it impossible for dividends to be covered by it. The best coverage was in 2011 with a ratio of 1.60, where free cash flow significantly surpassed dividend payouts. However, recent trends from 2020 to 2023 exhibit lower ratios around 0.005 to 0.0047, hinting at barely sufficient coverage. Despite an improved cash flow, the dividend growth or adjustments did not proportionally match, implying potential financial strategy revisions. Overall, the trend showcases periods of strength and fragility in dividend coverage by cash flows, classifiable as moderately worrying.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, maintaining consistent payouts without significant cuts.

Reviewing the dividend history, it is evident that while Encore Wire's dividend payments have fluctuated, the changes have been relatively minor. There were a couple of instances where dividends were reduced (e.g., from 0.10 to 0.06), reflecting a precise decline of 40%, but these instances were quite rare. Despite these reductions, no year experienced a drop greater than 20% consecutively. The primary trend over the past 20 years has shown that the company's dividend payouts have remained relatively stable, though at slightly varying levels. This overall stability is favorable for income-seeking investors, even though some years saw reductions.

Dividends Paid for Over 25 Years?

Consistency in dividend payments is crucial as it displays a company’s commitment to returning value to shareholders and reflects stability and confidence in future earnings.

Encore Wire (WIRE) began paying dividends only in 2007, which undermines its standing in terms of consistent dividends for over 25 years. Despite favorable trends in the payout post-2007, the notable gap before 2007 fails the criterion of consistent 25-year dividend payments. This inconsistency can be a deterrent for long-term, income-focused investors looking for stable returns amidst economic cycles.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases provide a boost to the stock price and earnings per share (EPS) over time by reducing the number of shares outstanding.

Encore Wire has shown a trend of consistently repurchasing shares over the past 20 years. The number of shares decreased from 22,924,459 in 2003 to 16,873,000 in 2023, which indicates a steady buying back of shares. The average repurchased rate of -1.4619% per year further reinforces this trend. These actions are typically viewed positively as they reflect management's confidence in the firm's future and are generally seen as a method to return value to shareholders. Hence, Encore Wire's stock repurchases are good for long-term shareholders.