Is It Smart To Buy Rent-A-Center, Inc. (NASDAQ:RCII) Before It Goes Ex-Dividend?

Readers hoping to buy Rent-A-Center, Inc. (NASDAQ:RCII) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 5th of April in order to be eligible for this dividend, which will be paid on the 22nd of April.

Rent-A-Center's next dividend payment will be US$0.31 per share. Last year, in total, the company distributed US$1.24 to shareholders. Based on the last year's worth of payments, Rent-A-Center stock has a trailing yield of around 2.1% on the current share price of $58.11. If you buy this business for its dividend, you should have an idea of whether Rent-A-Center's dividend is reliable and sustainable. So we need to investigate whether Rent-A-Center can afford its dividend, and if the dividend could grow.

See our latest analysis for Rent-A-Center

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Rent-A-Center paying out a modest 30% of its earnings. 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. Fortunately, it paid out only 31% 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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Rent-A-Center's earnings have been skyrocketing, up 84% per annum for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Rent-A-Center has increased its dividend at approximately 18% 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

Has Rent-A-Center got what it takes to maintain its dividend payments? It's great that Rent-A-Center is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Rent-A-Center looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

On that note, you'll want to research what risks Rent-A-Center is facing. For example, we've found 3 warning signs for Rent-A-Center that we recommend you consider before investing in the business.

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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