My 4% Dividend Yield Portfolio: Looking Forward To Eaton's Dividend Growth In February

| About: Eaton Corp. (ETN)

Summary

Eaton Corp. published its results for the fourth quarter of 2015 and delivered a forecast for 2016.

Though the revenue growth is relatively pale, the EPS forecast is encouraging.

I expect a higher dividend per share announced by the end of February.

Eaton Corp. Plc (NYSE:ETN) is one of the core holdings within my 4% dividend yield portfolio.

The company published its Q4'15 earnings last week. The restructuring projects alongside slightly lower taxes, and the shares repurchase program allowed Eaton to maintain its quarterly Operating Margins percentage at 15%.

Though the markets were indeed soft for Eaton electrical systems' business, the company was able to deliver a higher-than-expected EPS at the levels of $1.17 for the quarter and $4.27 for the full year.

The soft business was seen at the majority of its segments, which led to a 10% revenue decline compared to Q4'14 and a total of 8% full-year revenue decline from 2014 to 2015.

The forward-looking 2016 expectations in term of revenue continue with the same trend of sales decline. The organic revenue forecast is of 2-4% decline year over year, which implies about $20B yearly revenue in 2016.

While the top line is expected to trend down, Eaton has plans to improve its bottom line. The overall efficiencies that the company is pursuing are expected to improve the operation margins, from 15% in 2015 to 15.6% in 2016.

The 2016 EPS is expected to land at the range of $4.15-4.45. This would be slightly better by a couple of points compared to the $4.27 EPS that was achieved 2015.

Eaton's dividend payout ratio in 2015 was at 52%. The question is whether there is room for a dividend increase in the coming year.

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The dividend paid in 2015 was at $2.2 per share, which represents ~$1.02B for the year. The 2016 forecasted cash flow is expected to reach ~$2.2B, which is about 15% higher compared to the $1.9B generated in 2015.

The last time the company froze its yearly dividend was back in 2009, when the payout ratio reached 88%.

The forecasted EPS in 2016 is slightly improved compared to last year's figure.

The next table captures the sensitivity of dividend levels at different EPS achieved levels, based on the expected range of $4.15-4.45. The green highlighted scenarios are those that have the payout ratio below 60%, which is marked as a manageable level.

Based on this analysis, assuming the company has high confidence to achieve the midpoint level of the EPS range, the dividend could be raised from $2.2 up to the $2.6, which represents a 60% payout ratio. This would highly depend on Eaton's outlook beyond 2016 and its ability to eventually achieve growth in the top line as well.

Conclusions

Though Eaton's sales forecast is still soft for the coming year, based on the massive restructuring efforts the EPS expectations is expected to be slightly higher year over year.

Based on the low dividend payout ratio the company had in 2015, I am optimistic that a dividend increase would be announced soon, towards the end of February.

Eaton was a dividend power machine during the recent six years, and the current forecast tells of the company maintaining its position as such even in a challenging year. The current dividend is at 4.0%, and it could exceed 4.5% by the end of the month if the stock price remains at these levels of $54.

I would consider adding more, should the selloff that we are facing escalate to the Industrial sector.

Happy investing.

Disclosure: I am/we are long ETN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.