Readers hoping to buy Genuine Parts Company (NYSE:GPC) 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 5th of March in order to receive the dividend, which the company will pay on the 1st of April.
Genuine Parts's next dividend payment will be US$0.79 per share, and in the last 12 months, the company paid a total of US$3.05 per share. Last year's total dividend payments show that Genuine Parts has a trailing yield of 3.6% on the current share price of $87.24. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Genuine Parts can afford its dividend, and if the dividend could grow.
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. Genuine Parts paid out more than half (72%) of its earnings last year, which is a regular payout ratio for most companies. 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. Dividends consumed 74% 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 Genuine Parts'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 with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Genuine Parts's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Genuine Parts has lifted its dividend by approximately 7.0% a year on average.
The Bottom Line
From a dividend perspective, should investors buy or avoid Genuine Parts? While earnings per share are flat, at least Genuine Parts has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
Ever wonder what the future holds for Genuine Parts? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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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