The Gorman-Rupp Company (NYSE:GRC) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 14th of August in order to be eligible for this dividend, which will be paid on the 10th of September.
Gorman-Rupp's next dividend payment will be US$0.14 per share, and in the last 12 months, the company paid a total of US$0.54 per share. Looking at the last 12 months of distributions, Gorman-Rupp has a trailing yield of approximately 1.7% on its current stock price of $31.99. 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 Gorman-Rupp can afford its dividend, and if the dividend could grow.
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. That's why it's good to see Gorman-Rupp paying out a modest 37% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It distributed 31% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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. This is why it's a relief to see Gorman-Rupp earnings per share are up 4.8% per annum over the last five years. Recent growth has not been impressive. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Gorman-Rupp has delivered an average of 7.7% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Has Gorman-Rupp got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Gorman-Rupp is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Gorman-Rupp is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Gorman-Rupp, and we would prioritise taking a closer look at it.
Curious about whether Gorman-Rupp has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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