W.W. Grainger, Inc. (NYSE:GWW) stock is about to trade ex-dividend in 4 days. You can purchase shares before the 6th of November in order to receive the dividend, which the company will pay on the 1st of December.
W.W. Grainger's upcoming dividend is US$1.53 a share, following on from the last 12 months, when the company distributed a total of US$6.12 per share to shareholders. Looking at the last 12 months of distributions, W.W. Grainger has a trailing yield of approximately 1.7% on its current stock price of $350.02. 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 usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. W.W. Grainger paid out a comfortable 50% of its profit last year. 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?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, W.W. Grainger has lifted its dividend by approximately 13% a year on average.
Should investors buy W.W. Grainger for the upcoming dividend? 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. Generally we like to see both low payout ratios and strong earnings per share growth, but W.W. Grainger is halfway there. There's a lot to like about W.W. Grainger, and we would prioritise taking a closer look at it.
On that note, you'll want to research what risks W.W. Grainger is facing. Every company has risks, and we've spotted 4 warning signs for W.W. Grainger you should know about.
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.
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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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