Tractor Supply (NASDAQ:TSCO) Could Be A Buy For Its Upcoming Dividend

By
Simply Wall St
Published
February 14, 2021
NasdaqGS:TSCO

It looks like Tractor Supply Company (NASDAQ:TSCO) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 19th of February to receive the dividend, which will be paid on the 9th of March.

Tractor Supply's next dividend payment will be US$0.52 per share, on the back of last year when the company paid a total of US$1.60 to shareholders. Based on the last year's worth of payments, Tractor Supply has a trailing yield of 1.0% on the current stock price of $159.93. If you buy this business for its dividend, you should have an idea of whether Tractor Supply's dividend is reliable and sustainable. As a result, readers should always check whether Tractor Supply has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Tractor Supply

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. Tractor Supply paid out just 23% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. Luckily it paid out just 16% of its free cash flow last year.

It's positive to see that Tractor Supply'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
NasdaqGS:TSCO Historic Dividend February 14th 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, Tractor Supply's earnings per share have been growing at 16% a year for the past five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Tractor Supply has delivered an average of 28% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Tractor Supply? We love that Tractor Supply is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Tractor Supply for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 1 warning sign for Tractor Supply that you should be aware of before investing in their shares.

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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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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