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Reliance Steel & Aluminum Co. (NYSE:RS) stock is about to trade ex-dividend in two days. This means that investors who purchase shares on or after the 19th of November will not receive the dividend, which will be paid on the 4th of December.
Reliance Steel & Aluminum's upcoming dividend is US$0.63 a share, following on from the last 12 months, when the company distributed a total of US$2.50 per share to shareholders. Looking at the last 12 months of distributions, Reliance Steel & Aluminum has a trailing yield of approximately 2.1% on its current stock price of $118.2. If you buy this business for its dividend, you should have an idea of whether Reliance Steel & Aluminum's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
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. Fortunately Reliance Steel & Aluminum's payout ratio is modest, at just 39% of profit. A useful secondary check can be to evaluate whether Reliance Steel & Aluminum generated enough free cash flow to afford its dividend. The good news is it paid out just 15% of its free cash flow in the last year.
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. With that in mind, we're encouraged by the steady growth at Reliance Steel & Aluminum, with earnings per share up 5.4% on average 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. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Reliance Steel & Aluminum has delivered 20% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Should investors buy Reliance Steel & Aluminum for the upcoming dividend? Earnings per share have been growing moderately, and Reliance Steel & Aluminum 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. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Reliance Steel & Aluminum is halfway there. Reliance Steel & Aluminum looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we've discovered 2 warning signs for Reliance Steel & Aluminum 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.
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