Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Lear Corporation (NYSE:LEA) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 28th of August in order to be eligible for this dividend, which will be paid on the 17th of September.
Lear's next dividend payment will be US$0.75 per share, and in the last 12 months, the company paid a total of US$3.00 per share. Based on the last year's worth of payments, Lear has a trailing yield of 2.7% on the current stock price of $110.56. If you buy this business for its dividend, you should have an idea of whether Lear's dividend is reliable and sustainable. As a result, readers should always check whether Lear has been able to grow its dividends, or if the dividend might be cut.
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. Lear is paying out just 21% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Lear generated enough free cash flow to afford its dividend. It paid out 21% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Lear'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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Lear has grown its earnings rapidly, up 22% a year for the past five years. Lear earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 9 years, Lear has lifted its dividend by approximately 22% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Has Lear got what it takes to maintain its dividend payments? Lear has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. It's a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for Lear? See what the 17 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.