Sonic Automotive, Inc. (NYSE:SAH) will increase its dividend from last year's comparable payment on the 12th of January to $0.30. The payment will take the dividend yield to 2.3%, which is in line with the average for the industry.
Sonic Automotive Doesn't Earn Enough To Cover Its Payments
Solid dividend yields are great, but they only really help us if the payment is sustainable. Despite not generating a profit, Sonic Automotive is still paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.
Earnings per share is forecast to rise by 178.9% over the next year. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 120% over the next year.
Sonic Automotive Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2013, the dividend has gone from $0.10 total annually to $1.20. This works out to be a compound annual growth rate (CAGR) of approximately 28% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.
The Company Could Face Some Challenges Growing The Dividend
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Sonic Automotive has impressed us by growing EPS at 14% per year over the past five years. Unprofitable companies aren't normally our pick for a dividend stock, but we like the growth that we have been seeing. All is not lost, but the future of the dividend definitely rests upon the company's ability to become profitable soon.
Sonic Automotive's Dividend Doesn't Look Sustainable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Sonic Automotive that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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