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Is It Smart To Buy PACCAR Inc (NASDAQ:PCAR) Before It Goes Ex-Dividend?

Simply Wall St

PACCAR Inc (NASDAQ:PCAR) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 13th of August, you won't be eligible to receive this dividend, when it is paid on the 4th of September.

PACCAR's next dividend payment will be US$0.32 per share. Last year, in total, the company distributed US$3.28 to shareholders. Based on the last year's worth of payments, PACCAR stock has a trailing yield of around 5.0% on the current share price of $65.26. 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.

See our latest analysis for PACCAR

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. PACCAR has a low and conservative payout ratio of just 18% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 56% of its free cash flow as dividends, within the usual range 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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:PCAR Historical Dividend Yield, August 8th 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, PACCAR's earnings per share have been growing at 16% a year for the past five years. PACCAR has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of 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 10 years, PACCAR has increased its dividend at approximately 15% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

From a dividend perspective, should investors buy or avoid PACCAR? Earnings per share have grown at a nice rate in recent times and over the last year, PACCAR paid out less than half its earnings and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

Ever wonder what the future holds for PACCAR? See what the 16 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.

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.