National Tyre & Wheel Limited (ASX:NTD) stock is about to trade ex-dividend in 4 days time. Investors can purchase shares before the 2nd of September in order to be eligible for this dividend, which will be paid on the 13th of September.
National Tyre & Wheel's next dividend payment will be AU$0.035 per share, on the back of last year when the company paid a total of AU$0.035 to shareholders. Based on the last year's worth of payments, National Tyre & Wheel has a trailing yield of 8.9% on the current stock price of A$0.4. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. National Tyre & Wheel has a low and conservative payout ratio of just 4.0% of its income after tax. 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 93% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
National Tyre & Wheel paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were National Tyre & Wheel to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why we're glad to see earnings per share up 18% over the past 12 months. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
One year is a very short time frame in the pantheon of investing, so we wouldn't get too hung up on these numbers.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 2 years, National Tyre & Wheel has lifted its dividend by approximately 33% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Is National Tyre & Wheel worth buying for its dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
Curious about whether National Tyre & Wheel has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.
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.
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