It looks like LKQ Corporation (NASDAQ:LKQ) is about to go ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, LKQ investors that purchase the stock on or after the 10th of August will not receive the dividend, which will be paid on the 1st of September.
The company's upcoming dividend is US$0.25 a share, following on from the last 12 months, when the company distributed a total of US$1.00 per share to shareholders. Based on the last year's worth of payments, LKQ stock has a trailing yield of around 1.8% on the current share price of $54.43. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether LKQ has been able to grow its dividends, or if the dividend might be cut.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. LKQ has a low and conservative payout ratio of just 18% of its income after tax. A useful secondary check can be to evaluate whether LKQ generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 25% of its cash flow 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?
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. It's encouraging to see LKQ has grown its earnings rapidly, up 24% a year for the past five years. LKQ looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.
Given that LKQ has only been paying a dividend for a year, there's not much of a past history to draw insight from.
Has LKQ got what it takes to maintain its dividend payments? LKQ has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Overall we think this is an attractive combination and worthy of further research.
While it's tempting to invest in LKQ for the dividends alone, you should always be mindful of the risks involved. To that end, you should learn about the 3 warning signs we've spotted with LKQ (including 1 which is significant).
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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