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Advance Auto Parts' (NYSE:AAP) Dividend Will Be Increased To US$1.50

Advance Auto Parts, Inc. (NYSE:AAP) will increase its dividend on the 1st of July to US$1.50. The announced payment will take the dividend yield to 2.7%, which is in line with the average for the industry.

See our latest analysis for Advance Auto Parts

Advance Auto Parts' Dividend Is Well Covered By Earnings

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Advance Auto Parts was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 92% indicates it is more focused on returning cash to shareholders than growing the business.

The next year is set to see EPS grow by 49.0%. If the dividend continues on this path, the payout ratio could be 52% by next year, which we think can be pretty sustainable going forward.

historic-dividend
historic-dividend

Advance Auto Parts Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2012, the dividend has gone from US$0.24 to US$6.00. This means that it has been growing its distributions at 38% per annum over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

The Dividend Looks Likely To Grow

Investors could be attracted to the stock based on the quality of its payment history. It's encouraging to see Advance Auto Parts has been growing its earnings per share at 11% a year over the past five years. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.

In Summary

Overall, this is a reasonable dividend, and it being raised is an added bonus. On the plus side, the dividend looks sustainable by most measures but it is let down by the lack of cash flows. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Advance Auto Parts that investors should know about before committing capital to this stock. Is Advance Auto Parts not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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.