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Is Sturm, Ruger & Co. Staring Down the Barrel of a Dividend Cut?

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In March of last year, Chief Income Strategist Marc Lichtenfeld reviewed firearm manufacturer Sturm, Ruger & Co. (NYSE: RGR) and gave the company’s dividend safety a big, fat “F.”

At the time, the company’s free cash flow growth was terrible, its payout ratio was too high and its dividend was so unpredictable that it was impossible for investors to rely on it for consistent income.

But that was nearly a year ago.

A lot can happen in a year. Perhaps the company has turned the ship around.

After all, 2021 was a fantastic year for Sturm, Ruger & Co. So maybe the analysts were wrong about their 2023 projections and it hit the bull’s-eye this year.

That’s what we’re aiming to find out today.

The first thing we always look at when it comes to dividend safety is the company’s free cash flow – specifically, whether it’s expected to increase or decrease from where it was in previous years.

While there are no estimates available for free cash flow in 2023, we can use other factors to make our prediction. Now that we’re nearing the release of the company’s annual report, analysts have a much better idea of where its financials stand relative to where they were last March.

There’s no doubt 2022 was a rough year for the company…

And it doesn’t look like 2023 will be any better.

Net income is projected to be nearly cut in half from $88.3 million to $49.9 million.

And revenue is expected to drop by almost $50 million – from $596 million to $547 million. That’d be a drop of 8.2% over the past year after an 18.5% decline from 2021 to 2022.

Chart: Revenue Trending in the Wrong Direction

Unless the company can pull off some sort of miracle in its full-year earnings report, its 2023 revenue will likely be its lowest since 2019 – especially when you consider that it reported free cash flow of -$11.3 million for the third quarter of 2023.

On top of all of this, Sturm, Ruger & Co. has a variable quarterly dividend.

Rather than paying shareholders a consistent, fixed amount, the company determines its dividend based on how it performs each quarter.

The company’s practice is to pay out approximately 40% of its net income every quarter.

So if its net income were to drop by half from one year to the next (as is projected for 2023), your dividend could also be cut in half.

If there’s one bright spot in the company’s financials, it’s the payout ratio. I don’t think that will be a problem over the next year.

But with revenue and net income continuing a downward trend, I have no choice but to reaffirm Marc’s assessment from last March and give its dividend safety another “F.”

Dividend Safety Rating: F

Dividend Grade Guide

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