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 Graco Inc. (NYSE:GGG) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 16th of October to receive the dividend, which will be paid on the 4th of November.
Graco's upcoming dividend is US$0.17 a share, following on from the last 12 months, when the company distributed a total of US$0.70 per share to shareholders. Last year's total dividend payments show that Graco has a trailing yield of 1.1% on the current share price of $64.55. 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! We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Graco paid out a comfortable 42% of its profit last year. A useful secondary check can be to evaluate whether Graco generated enough free cash flow to afford its dividend. It distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Graco'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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Graco earnings per share are up 5.3% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Graco has increased its dividend at approximately 10% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Is Graco worth buying for its dividend? Earnings per share have been growing moderately, and Graco 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. It might be nice to see earnings growing faster, but Graco is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Graco, and we would prioritise taking a closer look at it.
While it's tempting to invest in Graco for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 3 warning signs for Graco you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.