Advance Auto Parts (NYSE:AAP) Is Paying Out A Dividend Of $0.25

The board of Advance Auto Parts, Inc. (NYSE:AAP) has announced that it will pay a dividend on the 25th of July, with investors receiving $0.25 per share. This payment means that the dividend yield will be 2.2%, which is around the industry average.

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Estimates Indicate Advance Auto Parts' Dividend Coverage Likely To Improve

We aren't too impressed by dividend yields unless they can be sustained over time. Even in the absence of profits, Advance Auto Parts is paying a dividend. The company is also yet to generate cash flow, so the dividend sustainability is definitely questionable.

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 4.4%, so there isn't too much pressure on the dividend.

Check out 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 works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. 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.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Advance Auto Parts' earnings per share has shrunk at 48% a year over the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. 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

Overall, this isn't a great candidate as an income investment, even though the dividend was stable this year. The company isn't making enough to be paying as much as it is, and the other factors don't look particularly promising either. Overall, the dividend is not reliable enough to make this a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for Advance Auto Parts that you should be aware of before investing. Is Advance Auto Parts not quite the opportunity you were looking for? Why not check out our selection of top 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.