Fastenal Company (NASDAQ:FAST) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 27th of July in order to be eligible for this dividend, which will be paid on the 25th of August.
Fastenal's next dividend payment will be US$0.25 per share, and in the last 12 months, the company paid a total of US$1.00 per share. Based on the last year's worth of payments, Fastenal stock has a trailing yield of around 2.2% on the current share price of $45.84. 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 check whether the dividend payments are covered, and if earnings are growing.
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. Fastenal paid out 65% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 68% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Fastenal'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?
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. Fortunately for readers, Fastenal's earnings per share have been growing at 12% a year for the past five years. Fastenal has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Fastenal has increased its dividend at approximately 17% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
From a dividend perspective, should investors buy or avoid Fastenal? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Fastenal's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 65% and 68% respectively. In summary, while it has some positive characteristics, we're not inclined to race out and buy Fastenal today.
On that note, you'll want to research what risks Fastenal is facing. To help with this, we've discovered 3 warning signs for Fastenal that you should be aware of before investing in their shares.
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. 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.