Autoliv, Inc. (NYSE:ALV) stock is about to trade ex-dividend in 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 important as the process of settlement involves a full business day. So if you miss that date, you would not show up on the company’s books on the record date. Thus, you can purchase Autoliv’s shares before the 7th of March in order to receive the dividend, which the company will pay on the 24th of March.
The company’s upcoming dividend is US$0.70 a share, following on from the last 12 months, when the company distributed a total of US$2.80 per share to shareholders. Based on the last year’s worth of payments, Autoliv has a trailing yield of 2.9% on the current stock price of US$97.35. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Autoliv has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for Autoliv
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 Autoliv paying out a modest 34% of its earnings. 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. Thankfully its dividend payments took up just 46% of the free cash flow it generated, which is a comfortable payout ratio.
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.
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Autoliv earnings per share are up 9.4% per annum over the last five years. Management have been reinvested more than half of the company’s earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Autoliv has lifted its dividend by approximately 2.6% 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.
From a dividend perspective, should investors buy or avoid Autoliv? Earnings per share growth has been growing somewhat, and Autoliv 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 Autoliv is being conservative with its dividend payouts and could still perform reasonably over the long run. There’s a lot to like about Autoliv, and we would prioritise taking a closer look at it.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example, we’ve found 2 warning signs for Autoliv that we recommend you consider before investing in the business.
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.