Sonic Automotive's (NYSE:SAH) Shareholders Will Receive A Bigger Dividend Than Last Year

Sonic Automotive, Inc.'s (NYSE:SAH) dividend will be increasing from last year's payment of the same period to $0.28 on 13th of January. This takes the annual payment to 2.5% of the current stock price, which is about average for the industry.

Our analysis indicates that SAH is potentially undervalued!

Sonic Automotive's Earnings Easily Cover The Distributions

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. However, Sonic Automotive's earnings easily cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.

Looking forward, earnings per share is forecast to rise by 15.1% over the next year. If the dividend continues on this path, the payout ratio could be 11% by next year, which we think can be pretty sustainable going forward.

Sonic Automotive Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The annual payment during the last 10 years was $0.10 in 2012, and the most recent fiscal year payment was $1.12. This works out to be a compound annual growth rate (CAGR) of approximately 27% 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 Dividend Looks Likely To Grow

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 45% per year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.

We Really Like Sonic Automotive's Dividend

Overall, a dividend increase is always good, and we think that Sonic Automotive is a strong income stock thanks to its track record and growing earnings. Distributions are quite easily covered by earnings, which are also being converted to cash flows. Taking this all into consideration, this looks like it could be a good dividend opportunity.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Sonic Automotive that investors should take into consideration. 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.