Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tractor Supply Company (NASDAQ:TSCO) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Thus, you can purchase Tractor Supply's shares before the 24th of November in order to receive the dividend, which the company will pay on the 12th of December.
The company's next dividend payment will be US$1.03 per share, on the back of last year when the company paid a total of US$4.12 to shareholders. Calculating the last year's worth of payments shows that Tractor Supply has a trailing yield of 2.0% on the current share price of $202.61. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Tractor Supply can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately Tractor Supply's payout ratio is modest, at just 39% of profit. 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. Over the last year it paid out 54% 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.
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. It's encouraging to see Tractor Supply has grown its earnings rapidly, up 26% a year for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Tractor Supply has lifted its dividend by approximately 26% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
To Sum It Up
Should investors buy Tractor Supply for the upcoming dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Tractor Supply paid out less than half its earnings and a bit over half its free cash flow. There's a lot to like about Tractor Supply, and we would prioritise taking a closer look at it.
While it's tempting to invest in Tractor Supply for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 1 warning sign for Tractor Supply you should know about.
A common investing mistake is buying the first interesting stock you see. Here you can find a full 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.