Last update on 2024-06-27

Advance Auto Parts (AAP) - Dividend Analysis (Final Score: 4/8)

Analyzing Advance Auto Parts (AAP) dividend stability with an 8-criteria system, scoring 4/8. Review attractiveness and sustainability over 20 years.

Short Analysis - Dividend Score: 4

We're running Advance Auto Parts (AAP) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The dividend analysis of Advance Auto Parts (AAP) focuses on eight key criteria: dividend yield, growth rate, payout ratio, dividend coverage by earnings and cash flow, dividend stability, dividend duration, and stock repurchases. AAP's dividend yield of 2.4578% stands out as higher than the industry average, despite fluctuations. The average annual dividend growth rate is significantly high at 28.12%, though volatile. AAP maintains an average payout ratio of 24.39% but faced a concerning spike to 299.82% in 2023. Historically, dividends were well covered by earnings but encountered sustainability issues with a 2023 ratio of 2.998. Cash flow coverage data isn't provided, but it's a critical factor. Dividends have been stable with no annual drop exceeding 20%, starting from 2006 rather than 25 years ago. AAP's consistent stock repurchases indicate good financial health.

Insights for Value Investors Seeking Stable Income

Based on the analysis, Advance Auto Parts (AAP) shows some strengths like a higher than average dividend yield and consistent stock repurchases. However, the significant fluctuation in dividend growth and payout ratios raises caution. The recent spike in the payout ratio and reduced earnings coverage in 2023 could limit the dividend’s future sustainability. If you're a potential investor, it’s crucial to consider these volatility and sustainability factors before deciding. It might be wise to watch for stabilization in AAP's financial metrics before fully investing.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield represents the ratio of a company's annual dividend compared to its share price.

Advance Auto Parts (AAP) has a current dividend yield of 2.4578%, which is notably higher than the industry average of 1.21%. This indicates a relatively attractive return for dividend investors compared to its peers. Over the last 20 years, AAP's dividend yield has experienced significant fluctuations but has markedly increased in recent years, peaking at 4.0808% in 2021. Despite a dip from this peak to 2.4578% in 2023, the yield remains well above the industry average. This trend could be positive for income-focused investors who prioritize strong dividend returns, though potential investors should consider the causes of these fluctuations and the sustainability of higher dividends, especially given AAP's recent stock price volatility, closing at $61.03 in 2023.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate shows how much the dividend payouts have increased over a certain period. It is essential because it indicates the company's commitment to rewarding shareholders and its ability to generate cash flow.

The dividend growth rate for Advance Auto Parts over the last 20 years shows a rather erratic pattern. While the dividend ratios saw a significant jump in 2020 with a $420.83% increase, it showed rather modest growth post-2020, recording reductions, particularly notable is the -75% change seen in 2023. On average, the dividend growth rate was 28.12%, which significantly outstrips the 5% benchmark. However, investors should be cautious about this fluctuation and may need further analysis to rely on stable future payouts given the recent negative trend.

Average annual Payout Ratio lower than 65% in the last 20 years?

Average Payout Ratio lower than 65% in the last 20 years and why it is important.

Analyzing the given data from 2003 to 2023, Advance Auto Parts (AAP) has an average payout ratio of approximately 24.39%. This payout ratio is significantly below the 65% threshold, which is often considered a benchmark for a healthy and sustainable dividend. In terms of annual figures, AAP maintained a payout ratio well below 10% for the vast majority of the period from 2003 to 2019. However, in recent years, there has been a noticeable spike in 2021, 2022, and especially in 2023, where the payout ratio skyrocketed to 299.82%. This sharp increase could be a red flag indicating potential issues with earnings or changes in dividend policy. Despite the recent uptick, the long-term average remains positive, but ongoing monitoring is essential to ensure sustainability.

Dividends Well Covered by Earnings?

Dividends should ideally be well covered by earnings to ensure sustainability. A payout ratio less than 1 indicates good coverage.

Over the years, Advance Auto Parts (AAP) shows an increasing trend in dividend coverage by earnings, which is a positive sign for dividend sustainability. Until 2017, the dividend payouts were modest relative to earnings, maintaining a ratio well below 0.1. However, from 2018 onwards, the dividends increased significantly, showing higher coverage ratios of 0.174 in 2018 to 0.779 in 2022. In 2023, the ratio dramatically rose to 2.998, indicating that dividends per share significantly exceeded earnings per share. This spike in 2023 is concerning, as it suggests that the dividend might not be sustainable if earnings continue to fall, as shown by a plummet in EPS from $7.695 in 2022 to $0.5003 in 2023.

Dividends Well Covered by Cash Flow?

Dividends Coverage by Cash Flow and why it is important to consider

Dividends well covered by cash flow criterion relates to how well the company's dividends are covered by its free cash flow, which is the cash generated by the company after accounting for capital expenditures. The premise is that for a company to maintain its dividend payments, it should ideally pay them out of its free cash flow rather than resort to taking on debt. A consistent, strong coverage ratio indicates a company's financial health and its ability to keep paying dividends even during tougher times. It's a sign of financial prudence and stability, making it a vital consideration for dividend investors.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

Analyzing the dividend data over the past 20 years for Advance Auto Parts (AAP), we observe several significant patterns. From 2003 to 2013, the company maintained a consistent dividend per share (DPS) of $0.24. Starting in 2014, the DPS remained stable until 2018, at which point there was a notable increment, increasing to $1.25 in 2019 and to $3.25 in 2020. The most striking peak occurred in 2021 with a DPS of $6, but 2022 saw a significant reduction back to $1.5. Despite these fluctuations, none of the yearly drops exceed 20%. The trend exhibits a general rise in dividends over the period, with no single year experiencing a major cut exceeding the 20% threshold. Stability in dividend payments is crucial for income-focused investors, and AAP, until now, has showcased a reliable dividend trend. This trend signals a positive outlook for income-oriented shareholders, indicating that the instability, while present, does not surpass the critical 20% mark for drops.

Dividends Paid for Over 25 Years?

What does it mean to have a company paying dividends for over 25 years?

Advance Auto Parts (AAP) has not paid dividends for over 25 years. The dataset reveals that AAP only started paying dividends in 2006. This is particularly important as it denotes that AAP doesn't fulfill this criterion which many conservative investors consider as a sign of reliability and stability. Companies with a long track record of paying dividends are generally seen as more stable and reliable, making AAP less attractive under this specific criterion.

Reliable Stock Repurchases Over the Past 20 Years?

Examine the company's history of stock repurchases over the past 20 years and determine its reliability. Regular stock buybacks can be a sign of financial health, returning value to shareholders and indicating confidence from the company's management in its future prospects.

Over the past two decades, Advance Auto Parts (AAP) has demonstrated a steady history of stock repurchases. Analyzing the provided data from 2003 to 2023, we notice a downward trend in the number of shares, moving from 112,114,500 shares in 2003 to 59,432,000 shares in 2023. The reliable repurchase years highlight consistent shareholder value return, particularly during challenging financial periods. The average repurchase rate of -3.0594% confirms a net reduction of shares over time, enhancing EPS and providing a positive outlook. This trend indicates reliable repurchasing activity, reflecting robust financial management.