Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sturm, Ruger & Company, Inc. (NYSE:RGR) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Sturm Ruger's shares on or after the 14th of December will not receive the dividend, which will be paid on the 5th of January.
The company's next dividend payment will be US$5.00 per share, which looks like a nice increase on last year, when the company distributed a total of US$3.51 to shareholders. If you buy this business for its dividend, you should have an idea of whether Sturm Ruger's dividend is reliable and sustainable. So we need to investigate whether Sturm Ruger can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That's why it's good to see Sturm Ruger paying out a modest 40% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (66%) of its free cash flow in the past year, which is within an average range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Sturm Ruger, with earnings per share up 5.7% on average over the last five years. Decent historical earnings per share growth suggests Sturm Ruger has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Sturm Ruger has increased its dividend at approximately 19% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Should investors buy Sturm Ruger for the upcoming dividend? Earnings per share have been growing at a steady rate, and Sturm Ruger paid out less than half its profits and more than half its free cash flow as dividends over the last year. To summarise, Sturm Ruger looks okay on this analysis, although it doesn't appear a stand-out opportunity.
While it's tempting to invest in Sturm Ruger for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with Sturm Ruger and understanding them should be part of your investment process.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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