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Is It Smart To Buy Penske Automotive Group, Inc. (NYSE:PAG) Before It Goes Ex-Dividend?

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Simply Wall St
·4 min read
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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Penske Automotive Group, Inc. (NYSE:PAG) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 9th of February, you won't be eligible to receive this dividend, when it is paid on the 1st of March.

Penske Automotive Group's next dividend payment will be US$0.43 per share. Last year, in total, the company distributed US$1.68 to shareholders. Based on the last year's worth of payments, Penske Automotive Group has a trailing yield of 2.7% on the current stock price of $63.19. If you buy this business for its dividend, you should have an idea of whether Penske Automotive Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Penske Automotive Group

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. Penske Automotive Group has a low and conservative payout ratio of just 15% of its income after tax. A useful secondary check can be to evaluate whether Penske Automotive Group generated enough free cash flow to afford its dividend. The good news is it paid out just 13% 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.

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

historic-dividend
historic-dividend

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Penske Automotive Group's earnings per share have been growing at 11% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Penske Automotive Group has delivered 20% dividend growth per year on average over the past 10 years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Should investors buy Penske Automotive Group for the upcoming dividend? Penske Automotive Group has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. Penske Automotive Group 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 that end, you should learn about the 2 warning signs we've spotted with Penske Automotive Group (including 1 which is a bit concerning).

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.

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 editorial-team (at) simplywallst.com.