Advance Auto Parts (NYSE:AAP) Has Announced A Dividend Of $0.25

The board of Advance Auto Parts, Inc. (NYSE:AAP) has announced that it will pay a dividend of $0.25 per share on the 25th of April. This means the annual payment is 2.7% of the current stock price, which is above the average for the industry.

Estimates Indicate Advance Auto Parts' Dividend Coverage Likely To Improve

If the payments aren't sustainable, a high yield for a few years won't matter that much. Even in the absence of profits, Advance Auto Parts is paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.

Analysts expect a massive rise in earnings per share in the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 3.9%, so there isn't too much pressure on the dividend.

See our latest analysis for Advance Auto Parts

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the annual payment back then was $0.24, compared to the most recent full-year payment of $1.00. This implies that the company grew its distributions at a yearly rate of about 15% over that duration. Advance Auto Parts has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth Potential Is Shaky

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Advance Auto Parts' earnings per share has shrunk at 37% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

We're Not Big Fans Of Advance Auto Parts' Dividend

In summary, while it is good to see that the dividend hasn't been cut, we think that at current levels the payment isn't particularly sustainable. The company seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. Considering all of these factors, we wouldn't rely on this dividend if we wanted to live on the income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Advance Auto Parts that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.