Advance Auto Parts (NYSE:AAP) Is Due To Pay A Dividend Of $0.25

Advance Auto Parts, Inc. (NYSE:AAP) will pay a dividend of $0.25 on the 23rd of January. This means the dividend yield will be fairly typical at 2.1%.

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Advance Auto Parts' Future Dividend Projections Seem Positive

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Despite not generating a profit, Advance Auto Parts is still paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 4.3%, which makes us pretty comfortable with the sustainability of the dividend.

Check out our latest analysis for Advance Auto Parts

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was $0.24 in 2015, and the most recent fiscal year payment was $1.00. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Dividend Growth Potential Is Shaky

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Advance Auto Parts' EPS has declined at around 64% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

Advance Auto Parts' Dividend Doesn't Look Great

Overall, while some might be pleased that the dividend wasn't cut, we think this may help Advance Auto Parts make more consistent payments in the future. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. We don't think that this is a great candidate to be an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Advance Auto Parts that investors need to be conscious of moving forward. 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.