Sonic Automotive (NYSE:SAH) Is Increasing Its Dividend To $0.30

Sonic Automotive, Inc. (NYSE:SAH) has announced that it will be increasing its dividend from last year's comparable payment on the 12th of January to $0.30. This takes the annual payment to 2.4% of the current stock price, which is about average for the industry.

Check out our latest analysis for Sonic Automotive

Sonic Automotive Doesn't Earn Enough To Cover Its Payments

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Even though Sonic Automotive is not generating a profit, it is still paying a dividend. The company is also yet to generate cash flow, so the dividend sustainability is definitely questionable.

The next 12 months is set to see EPS grow by 194.8%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 100%, which probably can't continue without putting some pressure on the balance sheet.

Sonic Automotive Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2013, the annual payment back then was $0.10, compared to the most recent full-year payment of $1.20. This works out to be a compound annual growth rate (CAGR) of approximately 28% a year over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

The Company Could Face Some Challenges Growing The Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Sonic Automotive has impressed us by growing EPS at 14% per year over the past five years. Unprofitable companies aren't normally our pick for a dividend stock, but we like the growth that we have been seeing. As long as the company becomes profitable soon, it is on a trajectory that could see it being a solid dividend payer.

Sonic Automotive's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We don't think Sonic Automotive is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for Sonic Automotive that you should be aware of before investing. Is Sonic Automotive 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.