Installed Building Products (NYSE:IBP) Could Be A Buy For Its Upcoming Dividend

Readers hoping to buy Installed Building Products, Inc. (NYSE:IBP) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Installed Building Products’ shares on or after the 14th of September, you won’t be eligible to receive the dividend, when it is paid on the 30th of September.

The company’s upcoming dividend is US$0.32 a share, following on from the last 12 months, when the company distributed a total of US$1.26 per share to shareholders. Based on the last year’s worth of payments, Installed Building Products stock has a trailing yield of around 1.4% on the current share price of $91.22. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Installed Building Products

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Installed Building Products paid out just 23% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.

It’s positive to see that Installed Building Products’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.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

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. If earnings fall far enough, the company could be forced to cut its dividend. It’s encouraging to see Installed Building Products has grown its earnings rapidly, up 35% a year for the past five years.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past two years, Installed Building Products has increased its dividend at approximately 2.5% a year on average. It’s good to see both earnings and the dividend have improved – although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

The Bottom Line

Has Installed Building Products got what it takes to maintain its dividend payments? Earnings per share have grown at a nice rate in recent times and over the last year, Installed Building Products paid out less than half its earnings and a bit over half its free cash flow. Installed Building Products looks solid on this analysis overall, and we’d definitely consider investigating it more closely.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Our analysis shows 3 warning signs for Installed Building Products that we strongly recommend you have a look at before investing in the company.

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.