Readers hoping to buy W.W. Grainger, Inc. (NYSE:GWW) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase W.W. Grainger's shares before the 11th of February in order to be eligible for the dividend, which will be paid on the 1st of March.
The company's upcoming dividend is US$1.62 a share, following on from the last 12 months, when the company distributed a total of US$6.48 per share to shareholders. Based on the last year's worth of payments, W.W. Grainger stock has a trailing yield of around 1.3% on the current share price of $487.68. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see W.W. Grainger paying out a modest 32% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 52% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, W.W. Grainger's earnings per share have been growing at 15% a year for the past five years. W.W. Grainger is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, W.W. Grainger has lifted its dividend by approximately 9.4% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is W.W. Grainger an attractive dividend stock, or better left on the shelf? Earnings per share have grown at a nice rate in recent times and over the last year, W.W. Grainger paid out less than half its earnings and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.
So while W.W. Grainger looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Case in point: We've spotted 1 warning sign for W.W. Grainger you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
