W.W. Grainger, Inc. (NYSE:GWW) is about to trade ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 9th of August will not receive the dividend, which will be paid on the 1st of September.
W.W. Grainger’s upcoming dividend is US$1.44 a share, following on from the last 12 months, when the company distributed a total of US$5.76 per share to shareholders. Last year’s total dividend payments show that W.W. Grainger has a trailing yield of 2.1% on the current share price of $276.39. If you buy this business for its dividend, you should have an idea of whether W.W. Grainger’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. That’s why it’s good to see W.W. Grainger paying out a modest 38% of its earnings. A useful secondary check can be to evaluate whether W.W. Grainger generated enough free cash flow to afford its dividend. Fortunately, it paid out only 36% of its free cash flow in the past year.
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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 W.W. Grainger earnings per share are up 5.4% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, W.W. Grainger has lifted its dividend by approximately 14% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Should investors buy W.W. Grainger for the upcoming dividend? Earnings per share growth has been growing somewhat, and 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. It might be nice to see earnings growing faster, but W.W. Grainger is being conservative with its dividend payouts and could still perform reasonably over the long run. Overall we think this is an attractive combination and worthy of further research.
Curious what other investors think of W.W. Grainger? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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