2023-04-18 04:42:15 ET
Summary
- Ennis' almost 5% yield is well covered and growing nicely.
- Lack of any real leverage means Ennis can continue to generate sizable levels of cash flow in a slow growing sales environment.
- We expect shares to be bought aggressively on a convincing Q4 earnings print.
Intro
If we pull up a long-term Ennis, Inc. ( EBF ) chart, we see that shares continue to make higher highs and higher lows. In saying this, Ennis' 10-week moving average has moved below its corresponding 40-week average in recent sessions so we may see prices consolidate for some weeks in the stock before another sustained up-move can begin once more. Being a popular dividend-paying stock, Ennis' expected near-term consolidation may attract income-orientated investors for the following reason.
When a dividend is deemed sustainable, long-term income-orientated investors generally prefer lower prices in their underlyings. The reason being is that compounding can take place much faster in a portfolio when a higher number of shares (Assets) can be bought to produce income through the dividend growth investing model.
To this effect, Ennis currently pays out $1 a share in dividends per year. When we run this number off the stock's prevailing share price of $20.38, we get a prevailing dividend yield of 4.9%. Suffice it to say, given how inflation has increased in recent years, EBF stock's almost 5% dividend yield will undoubtedly attract attention but what is more important from a long-term investing standpoint is the following.
If high single-digit inflation remains with us for some time to come, it is absolutely essential that the long-term investor holds companies that pay out higher income every year. The capacity to grow the payout is fundamental in times of high inflation in order to protect purchasing power over the long term.
For example and excluding capital gains from this stock, an investor would recoup his investment in full after 20 years if Ennis averaged a 5% payout in a no-growth dividend environment. On the other hand, these 20 years would drop to 14 years if Ennis were able to average a mere 5% annual average dividend growth rate over the investing timeframe.
Suffice it to say, investors essentially invest for income, and the faster this income can come to the investor, the more efficient the investment. Therefore, let's go through the principal trends which can give us insights into whether Ennis can meaningfully grow its dividend over the long term. We will start off with the company's payout ratio.
Pay-Out Ratio
First, if we go to the company's cash dividend payoff ratio over the past 12 months we can see that $1 of dividends was paid out from a free cash flow Kitty of $1.73 per share. This gives us a cash dividend payout ratio of just under 58% which demonstrates that the dividend is sustainable at current levels. The pay-out gives us the quickest snapshot on whether Ennis' dividend is viable at its current price point so no worries here thus far from an affordability standpoint.
Dividend Growth
Almost a 5% dividend yield along with a payout ratio under 60% are attractive in their own rights but we must look at Ennis' growth numbers to ensure the investment can be protected over time. Dividend growth is important because it fosters confidence among shareholders plus it also enables those very same shareholders to earn a percentage of the company's profits. As we see below, Ennis' more near-term dividend growth numbers (12-month growth rate of 5.26%) actually exceed the corresponding 3-year and 5-year growth rates.
Balance Sheet
Total shareholder equity in the company continues to grow & surpassed $321 million in Ennis' latest quarter. Suffice it to say, even if we take Ennis' liabilities as a whole ($65.2 million) and divide them into the company's equity, we see that Ennis continues to run a very strong balance sheet (Total Liability to Equity ratio of a mere 0.2). This means the lion's share of Ennis' operating profit can be used to generate cash flow which then essentially fuels the company's dividend growth profile going forward.
Forward-Looking Earnings Expectations
Ennis has reported three consecutive earnings beats (EPS of $0.44 in Q3) and is expected to report $0.36 in the company's upcoming fourth-quarter numbers. If the company's Q4 number is met, the GAAP bottom-line number for the full fiscal year will be $1.71 which would be a significant $0.57 per share increase over the prior year. Therefore given the strength of Ennis' balance sheet, keen valuation, and consistent profitability, any improvement over consensus numbers should be bullish for Ennis and the dividend alike.
Conclusion
To sum up, consensus is looking for $0.36 per share in earnings for Ennis' upcoming fourth-quarter bottom-line number. If this number can be met, and taking into account Ennis' low pay-out ratio, strong dividend growth, and healthy yield , we would envisage strong buying to take place on an encouraging bottom-line print. We look forward to continued coverage.
For further details see:
Ennis: Dividend Trends As We Approach Q4 Earnings Announcement