Gray Television, Inc. (NYSE:GTN) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Gray Television's shares on or after the 14th of March will not receive the dividend, which will be paid on the 31st of March.
The company's next dividend payment will be US$0.08 per share, and in the last 12 months, the company paid a total of US$0.32 per share. Looking at the last 12 months of distributions, Gray Television has a trailing yield of approximately 3.1% on its current stock price of $10.47. If you buy this business for its dividend, you should have an idea of whether Gray Television's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Gray Television paid out just 7.3% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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 21% of its free cash flow last year.
It's positive to see that Gray Television's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. This is why it's a relief to see Gray Television earnings per share are up 4.3% per annum over the last five years. Gray Television is retaining more than three-quarters of its earnings and has a history of generating some growth in earnings. We think this is a reasonable combination.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Gray Television's dividend payments are effectively flat on where they were two years ago.
Should investors buy Gray Television for the upcoming dividend? Earnings per share growth has been growing somewhat, and Gray Television is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Gray Television is being conservative with its dividend payouts and could still perform reasonably over the long run. Gray Television looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Gray Television for the dividends alone, you should always be mindful of the risks involved. For instance, we've identified 3 warning signs for Gray Television (2 are a bit unpleasant) you should be aware of.
If you're in the market for strong dividend payers, we recommend checking 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.
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