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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Polaris Inc. (NYSE:PII) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 26th of February, you won't be eligible to receive this dividend, when it is paid on the 15th of March.
Polaris's next dividend payment will be US$0.63 per share. Last year, in total, the company distributed US$2.52 to shareholders. Based on the last year's worth of payments, Polaris stock has a trailing yield of around 2.1% on the current share price of $121.86. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Polaris distributed an unsustainably high 123% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Polaris generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 19% of its cash flow last year.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Polaris fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Polaris's 22% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Polaris has increased its dividend at approximately 12% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Polaris is already paying out 123% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
From a dividend perspective, should investors buy or avoid Polaris? It's not a great combination to see a company with earnings in decline and paying out 123% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Polaris's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Polaris.
With that being said, if you're still considering Polaris as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 5 warning signs for Polaris that you should be aware of before investing in their shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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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