Valvoline Inc. (NYSE:VVV) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 29th of August in order to receive the dividend, which the company will pay on the 16th of September.
Valvoline's next dividend payment will be US$0.11 per share, on the back of last year when the company paid a total of US$0.42 to shareholders. Looking at the last 12 months of distributions, Valvoline has a trailing yield of approximately 1.9% on its current stock price of $22.03. If you buy this business for its dividend, you should have an idea of whether Valvoline's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Valvoline paid out a comfortable 33% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 31% of the free cash flow it generated, which is a comfortable payout ratio.
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 fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Valvoline's earnings per share have remained 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. Earnings per share growth in recent times has not been a standout. 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Valvoline has delivered an average of 29% per year annual increase in its dividend, based on the past 3 years of dividend payments.
Should investors buy Valvoline for the upcoming dividend? The company has barely grown earnings per share over this time, but at least it's paying out a decently low percentage of its earnings and cashflow as dividends. This could suggest management is reinvesting in future growth opportunities. Generally we like to see both low payout ratios and strong earnings per share growth, but Valvoline is halfway there. Valvoline looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Ever wonder what the future holds for Valvoline? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.