Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sturm, Ruger & Company, Inc. (NYSE:RGR) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Sturm Ruger's shares before the 15th of August in order to be eligible for the dividend, which will be paid on the 29th of August.
The company's upcoming dividend is US$0.16 a share, following on from the last 12 months, when the company distributed a total of US$0.70 per share to shareholders. Based on the last year's worth of payments, Sturm Ruger has a trailing yield of 2.1% on the current stock price of US$33.25. If you buy this business for its dividend, you should have an idea of whether Sturm Ruger's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's 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. Sturm Ruger distributed an unsustainably high 199% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. It distributed 31% of its free cash flow as dividends, a comfortable payout level for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Sturm Ruger fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Check out our latest analysis for Sturm Ruger
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Sturm Ruger's earnings per share have dropped 28% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Sturm Ruger has seen its dividend decline 5.6% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
The Bottom Line
Should investors buy Sturm Ruger for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 199% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Sturm Ruger's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Sturm Ruger.
With that in mind though, if the poor dividend characteristics of Sturm Ruger don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 4 warning signs for Sturm Ruger that we strongly recommend you have a look at before investing in the company.
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.