Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see NewMarket Corporation (NYSE:NEU) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 13th of March to receive the dividend, which will be paid on the 1st of April.
NewMarket’s next dividend payment will be US$1.90 per share, and in the last 12 months, the company paid a total of US$7.60 per share. Based on the last year’s worth of payments, NewMarket stock has a trailing yield of around 1.8% on the current share price of $416.64. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
View our latest analysis for NewMarket
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately NewMarket’s payout ratio is modest, at just 32% of profit. 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 29% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that NewMarket’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see how much of its profit NewMarket paid out over the last 12 months.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it’s a relief to see NewMarket earnings per share are up 4.3% per annum over the last five years. 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. NewMarket has delivered 22% dividend growth per year on average over the past ten years. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Is NewMarket an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and NewMarket 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 significant earnings per share growth with a low payout ratio, and NewMarket is halfway there. Overall we think this is an attractive combination and worthy of further research.
So while NewMarket looks good from a dividend perspective, it’s always worthwhile being up to date with the risks involved in this stock. To that end, you should learn about the 2 warning signs we’ve spotted with NewMarket (including 1 which can’t be ignored).
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.