Sonic Automotive's (NYSE:SAH) Upcoming Dividend Will Be Larger Than Last Year's

Sonic Automotive, Inc.'s (NYSE:SAH) dividend will be increasing from last year's payment of the same period to $0.30 on 12th of January. This makes the dividend yield about the same as the industry average at 2.4%.

View our latest analysis for Sonic Automotive

Sonic Automotive Is Paying Out More Than It Is Earning

Unless the payments are sustainable, the dividend yield doesn't mean too much. Despite not generating a profit, Sonic Automotive is still paying a dividend. The company is also yet to generate cash flow, so the dividend sustainability is definitely questionable.

Earnings per share is forecast to rise by 175.2% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 126%, which probably can't continue without putting some pressure on the balance sheet.

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. Since 2013, the annual payment back then was $0.10, compared to the most recent full-year payment of $1.20. This implies that the company grew its distributions at a yearly rate of about 28% over that duration. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

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. It's not great that the company is not turning a profit, but the decent growth in recent years is certainly a positive sign. 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

In summary, while it's always good to see the dividend being raised, we don't think Sonic Automotive's payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Sonic Automotive 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.