It looks like W.W. Grainger, Inc. (NYSE:GWW) is about to go ex-dividend in the next 2 days. Ex-dividend means that investors that purchase the stock on or after the 7th of November will not receive this dividend, which will be paid on the 1st of December.
W.W. Grainger's next dividend payment will be US$1.4 per share, and in the last 12 months, the company paid a total of US$5.8 per share. Calculating the last year's worth of payments shows that W.W. Grainger has a trailing yield of 1.8% on the current share price of $317.67. 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! As a result, readers should always check whether W.W. Grainger has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately W.W. Grainger's payout ratio is modest, at just 33% of profit. A useful secondary check can be to evaluate whether W.W. Grainger generated enough free cash flow to afford its dividend. It distributed 37% 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. 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 W.W. Grainger earnings per share are up 8.7% 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. W.W. Grainger has delivered 14% dividend growth per year on average over the past ten years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Should investors buy W.W. Grainger for the upcoming dividend? Earnings per share have been growing moderately, and W.W. Grainger 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 W.W. Grainger is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about W.W. Grainger, and we would prioritise taking a closer look at it.
Wondering what the future holds for W.W. Grainger? See what the 21 analysts we track 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.
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