Yahoo Finance Don't Buy Genuine Parts Company (NYSE:GPC) For Its Next Dividend Without Doing These Checks
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Genuine Parts Company (NYSE:GPC) is about to go ex-dividend in just four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Genuine Parts' shares before the 3rd of June in order to receive the dividend, which the company will pay on the 1st of July.
The company's next dividend payment will be US$0.81 per share, and in the last 12 months, the company paid a total of US$3.26 per share. Last year's total dividend payments show that Genuine Parts has a trailing yield of 2.5% on the current share price of $131.12. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Genuine Parts
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Genuine Parts distributed an unsustainably high 178% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 22% of its free cash flow last year.
It's good to see that while Genuine Parts's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Genuine Parts's 17% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Genuine Parts has delivered an average of 7.1% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Genuine Parts is already paying out 178% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Has Genuine Parts got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 178% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Genuine Parts's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Genuine Parts is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Genuine Parts and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 5 warning signs with Genuine Parts and understanding them should be part of your investment process.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. 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.
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