Standard Motor Products (NYSE:SMP) Could Be A Buy For Its Upcoming Dividend

By
Simply Wall St
Published
May 08, 2021
NYSE:SMP

Standard Motor Products, Inc. (NYSE:SMP) stock is about to trade ex-dividend in 4 days. Investors can purchase shares before the 14th of May in order to be eligible for this dividend, which will be paid on the 1st of June.

Standard Motor Products's upcoming dividend is US$0.25 a share, following on from the last 12 months, when the company distributed a total of US$1.00 per share to shareholders. Looking at the last 12 months of distributions, Standard Motor Products has a trailing yield of approximately 2.1% on its current stock price of $47.58. If you buy this business for its dividend, you should have an idea of whether Standard Motor Products's dividend is reliable and sustainable. As a result, readers should always check whether Standard Motor Products has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Standard Motor Products

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. Standard Motor Products is paying out just 18% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Standard Motor Products generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 11% of its cash flow last year.

It's positive to see that Standard Motor Products'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 the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NYSE:SMP Historic Dividend May 9th 2021

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Standard Motor Products's earnings per share have been growing at 15% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Standard Motor Products has increased its dividend at approximately 17% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is Standard Motor Products an attractive dividend stock, or better left on the shelf? Standard Motor Products has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about Standard Motor Products, and we would prioritise taking a closer look at it.

So while Standard Motor Products looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For instance, we've identified 3 warning signs for Standard Motor Products (1 is a bit concerning) you should be aware of.

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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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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