It looks like Sturm, Ruger & Company, Inc. (NYSE:RGR) is about to go ex-dividend in the next two 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Sturm Ruger investors that purchase the stock on or after the 14th of May will not receive the dividend, which will be paid on the 29th of May.

The company's next dividend payment will be US$0.11 per share, on the back of last year when the company paid a total of US$0.46 to shareholders. Calculating the last year's worth of payments shows that Sturm Ruger has a trailing yield of 1.2% on the current share price of US$39.04. 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.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Sturm Ruger reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Sturm Ruger didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. The good news is it paid out just 17% of its free cash flow in the last year.

Click here to see how much of its profit Sturm Ruger paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Sturm Ruger reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Sturm Ruger has seen its dividend decline 9.7% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

We update our analysis on Sturm Ruger every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Sturm Ruger? It's hard to get used to Sturm Ruger paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Bottom line: Sturm Ruger has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Sturm Ruger don't faze you, it's worth being mindful of the risks involved with this business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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.