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It Might Not Be A Great Idea To Buy Sturm, Ruger & Company, Inc. (NYSE:RGR) For Its Next Dividend

Simply Wall St

Readers hoping to buy Sturm, Ruger & Company, Inc. (NYSE:RGR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 14th of August in order to receive the dividend, which the company will pay on the 30th of August.

Sturm Ruger's next dividend payment will be US$0.14 per share, and in the last 12 months, the company paid a total of US$1.15 per share. Looking at the last 12 months of distributions, Sturm Ruger has a trailing yield of approximately 2.6% on its current stock price of $43.81. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Sturm Ruger can afford its dividend, and if the dividend could grow.

See our latest analysis for Sturm Ruger

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see Sturm Ruger paying out a modest 39% of its earnings. 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. It paid out 96% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Sturm Ruger paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Sturm Ruger to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Sturm Ruger paid out over the last 12 months.

NYSE:RGR Historical Dividend Yield, August 9th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Sturm Ruger's earnings per share have fallen at approximately 17% a year over the previous 5 years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Sturm Ruger has delivered 13% dividend growth per year on average over the past 10 years.

To Sum It Up

Is Sturm Ruger an attractive dividend stock, or better left on the shelf? Sturm Ruger's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious about whether Sturm Ruger has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.