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Advance Auto Parts, Inc. (NYSE:AAP) Looks Interesting, And It's About To Pay A Dividend

Advance Auto Parts, Inc. (NYSE:AAP) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Advance Auto Parts' shares on or after the 16th of September, you won't be eligible to receive the dividend, when it is paid on the 1st of October.

The company's next dividend payment will be US$1.00 per share. Last year, in total, the company distributed US$4.00 to shareholders. Based on the last year's worth of payments, Advance Auto Parts stock has a trailing yield of around 2.0% on the current share price of $200.03. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Advance Auto Parts can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Advance Auto Parts

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Advance Auto Parts has a low and conservative payout ratio of just 19% of its income after tax. A useful secondary check can be to evaluate whether Advance Auto Parts generated enough free cash flow to afford its dividend. Luckily it paid out just 11% of its free cash flow last year.

It's positive to see that Advance Auto Parts's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Advance Auto Parts earnings per share are up 7.6% per annum over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends 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 last 10 years, Advance Auto Parts has lifted its dividend by approximately 32% 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.

Final Takeaway

Is Advance Auto Parts worth buying for its dividend? Earnings per share have been growing moderately, and Advance Auto Parts is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Advance Auto Parts is halfway there. It's a promising combination that should mark this company worthy of closer attention.

Curious what other investors think of Advance Auto Parts? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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