Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Vulcan Materials Company (NYSE:VMC) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 20th of August in order to receive the dividend, which the company will pay on the 6th of September.
Vulcan Materials's next dividend payment will be US$0.31 per share, and in the last 12 months, the company paid a total of US$1.24 per share. Based on the last year's worth of payments, Vulcan Materials has a trailing yield of 0.9% on the current stock price of $139.14. If you buy this business for its dividend, you should have an idea of whether Vulcan Materials's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. That's why it's good to see Vulcan Materials paying out a modest 28% of its earnings. A useful secondary check can be to evaluate whether Vulcan Materials generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 38% of the free cash flow it generated, which is a comfortable payout ratio.
It's positive to see that Vulcan Materials'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 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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Vulcan Materials has grown its earnings rapidly, up 93% a year for the past five years. Vulcan Materials is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Vulcan Materials's dividend payments per share have declined at 4.5% per year on average over the past 10 years, which is uninspiring. Vulcan Materials is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Is Vulcan Materials worth buying for its dividend? It's great that Vulcan Materials is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. It's a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for Vulcan Materials? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.