Money

Is This Company’s Dividend Bulletproof?

131 total views

Owners of Sturm, Ruger & Co. (NYSE: RGR) may feel safer owning one of the company’s guns than the stock because investors are staring down the barrel of a dividend cut.

The gunmaker’s revenue dropped by 18% in 2022 due to discounts and rebates by competitors and an increase in used gun sales.

As a result of lower sales and profit, free cash flow fell off a cliff to $49.5 million last year, down from $143.6 million in 2021.

Chart: Sturm, Ruger & Co.'s Falling Free Cash Flow
In 2022, Sturm, Ruger & Co. paid shareholders 86% of free cash flow. This year, I estimate the payout ratio will rise to nearly 95%. That’s redlining the payout ratio.

I want to see the payout ratio at 75% or lower to ensure that a company doesn’t have to cut its dividend if free cash flow slips.

It’s important to note that Sturm, Ruger & Co. has a variable dividend. It aims to pay out 40% of net income in dividends, and that’s why there have been so many dividend raises and cuts over the past 10 years.

Chart: Sturm, Ruger & Co.'s Variable Dividend
The most recently declared dividend is $0.42 per share, which is up a penny from last quarter’s but down 56% from the dividend a year ago. That said, the company paid a $5 per share special dividend in the fourth quarter of 2022. It did the same in August 2020.

Most financial websites will show Sturm, Ruger & Co.’s dividend yield as 4% or 3.3% depending on whether the site used the $0.42 per share dividend that was declared last week.

If you annualize the $0.42, it comes out to only a 2.8% yield.

We know that the company’s dividend is variable, so it has a very strong chance of being reduced in any given quarter. And considering that revenue and free cash flow are expected to decline in 2023, I suspect the dividend is in serious jeopardy of being lowered again in the next 12 months or so.

Dividend Safety Rating: F

Dividend Grade Guide
If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section.

Be sure to check whether I’ve written about your favorite stock recently. Click on the word “Search” in the top right part of the website homepage, type in the company name and hit enter.

Share this Post