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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PACCAR Inc (NASDAQ:PCAR) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 9th of November will not receive this dividend, which will be paid on the 1st of December.
PACCAR's next dividend payment will be US$0.32 per share, and in the last 12 months, the company paid a total of US$3.58 per share. Last year's total dividend payments show that PACCAR has a trailing yield of 3.9% on the current share price of $91.78. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. Fortunately PACCAR's payout ratio is modest, at just 31% of profit. A useful secondary check can be to evaluate whether PACCAR generated enough free cash flow to afford its dividend. It distributed 30% of its free cash flow as dividends, a comfortable payout level 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.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's not encouraging to see that PACCAR's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, PACCAR has lifted its dividend by approximately 26% a year on average.
Should investors buy PACCAR for the upcoming dividend? Earnings per share have been flat over this time, but we're intrigued to see that PACCAR is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. Generally we like to see both low payout ratios and strong earnings per share growth, but PACCAR is halfway there. It's a promising combination that should mark this company worthy of closer attention.
So while PACCAR looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Every company has risks, and we've spotted 2 warning signs for PACCAR you should know about.
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.
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