Advance Auto Parts, Inc. (NYSE: AAP) the stock is about to trade after dividend in four days. The ex-dividend date is generally set at one working day before the registration date which is the deadline by which you must be present in the books of the company as a shareholder to receive the dividend. It is important to know the ex-dividend date because any transaction in the share must have been settled by the registration date at the latest. This means that you will need to buy Advance Auto Parts shares before June 17 to receive the dividend, which will be paid on July 2.

The company’s next dividend payment will be US $ 1.00 per share, and over the past 12 months the company has paid a total of US $ 4.00 per share. Calculating the value of last year’s payouts shows that Advance Auto Parts has a 2.0% return on the current stock price of $ 199.44. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. That is why we should always check whether dividend payments seem sustainable and whether the business is growing.

See our latest review for Advance Auto Parts

If a company pays more dividends than it has earned, then the dividend could become unsustainable – which is not an ideal situation. Advance Auto Parts pays only 11% of its profit after tax, which is comfortably low and leaves a lot of leeway in the event of adverse events. Yet cash flow is still more important than earnings in valuing a dividend, so we need to see if the company has generated enough cash to pay for its distribution. The good news is that she has only paid out 6.6% of her free cash flow in the past year.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.

Click on here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.

The story continues

Have profits and dividends increased?

Stocks of companies that generate sustainable earnings growth often offer the best dividend prospects because it’s easier to raise the dividend when earnings rise. Investors love dividends, so if profits go down and the dividend is reduced, expect a stock to be sold massively at the same time. This is why it is a relief to see Advance Auto Parts’ earnings per share increase by 7.7% per year over the past five years. Earnings per share have steadily increased and management is reinvesting almost all of the earnings back into the company. If earnings are reinvested effectively, this could be a bullish combination for future earnings and dividends.

Most investors will primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Advance Auto Parts has generated dividend growth of 32% per year on average over the past 10 years. We are happy to see dividends increasing alongside earnings over multiple years, which may be a sign that the company intends to share the growth with its shareholders.

To summarize

From a dividend perspective, should investors buy or avoid Advance Auto Parts? Earnings per share growth has increased somewhat, and Advance Auto Parts pays less than half of its earnings and cash flow as dividends. This is interesting for several reasons, as it suggests that management may be reinvesting heavily in the company, but it also helps to increase the dividend over time. We’d rather see earnings grow faster, but the best long-term dividend-paying stocks typically combine significant earnings per share growth with a low payout ratio, and Advance Auto Parts is halfway there. There is a lot to like about Advance Auto Parts, and we would prioritize taking a closer look.

With this in mind, an essential part of in-depth stock research is being aware of the risks stocks currently face. Every business has risks, and we have spotted 1 warning sign for Advance Auto Parts you should know.

If you are looking for dividend paying stocks, we recommend check out our list of the highest dividend paying stocks with a yield above 2% and a dividend coming soon.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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