Readers hoping to buy W.W. Grainger, Inc. (NYSE:GWW) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 6th of November in order to be eligible for this dividend, which will be paid on the 1st of December.
W.W. Grainger's next dividend payment will be US$1.53 per share, on the back of last year when the company paid a total of US$6.12 to shareholders. Last year's total dividend payments show that W.W. Grainger has a trailing yield of 1.7% on the current share price of $350.02. 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. That's why it's good to see W.W. Grainger paying out a modest 50% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 37% 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 W.W. Grainger'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. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. W.W. Grainger has delivered an average of 13% per year annual increase in its dividend, based on the past 10 years of dividend payments.
Has W.W. Grainger got what it takes to maintain its dividend payments? Earnings per share have been flat over this time, but we're intrigued to see that W.W. Grainger 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. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine strong earnings per share growth with a low payout ratio, and W.W. Grainger is halfway there. W.W. Grainger looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in W.W. Grainger for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 4 warning signs for W.W. Grainger that you should be aware of before investing in their shares.
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.
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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