Why This Goodyear Dividend Hike Could Get Even Larger

By Chris Lange Updated Jan 13, 3:32AM EST · Published Sep 15, 10:20AM EDT

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Why This Goodyear Dividend Hike Could Get Even Larger — © Thinkstock

In a growing industry, Goodyear Tire & Rubber Co. (NASDAQ: GT) is looking to take advantage of the key drivers and push profits even higher. The company strengthened this message when it announced its updated financial performance targets and a solid dividend hike.

So what necessarily is driving this market and allowing for Goodyear to make these plays?

CEO Richard Kramer noted that consumers’ affinity for sport utility vehicles (SUVs) and other models requiring larger and more complex tires has played to Goodyear’s strengths. The increasing demand for tires with a diameter of 17 inches or more — which have higher profit margins — has boosted the business.

In terms of the financial performance, Goodyear has a $3 billion target for its annual segment operating income in 2020, and a cumulative free cash flow target of $4.3 billion to $4.9 billion from 2017 to 2020.

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Overall, management believes that its combination of innovation and technology leadership, industry-leading products and strong global brand provide it with a competitive advantage to deliver on its targets.

At the same time, the company announced that it will return as much as $4 billion to shareholders. As part of this plan, Goodyear is hiking its dividend by 43%, a three-cent raise to $0.10 per share. The increase will take place starting with the December 1 payout.

Looking at the consensus estimates for earnings per share for 2016 and 2017 ($4.08 and $4.32, respectively), the payout for each is between 2.0% and 2.5%. If the company continues to grow according to its targets, we could see rapid expansion in the dividend over the course of the next few years.

Kramer detailed in a statement:

Our capital allocation plan demonstrates Goodyear’s commitment to creating value by maintaining financial flexibility to execute our strategic plan, continuing to strengthen our balance sheet and investing for future growth while also providing significant direct returns to shareholders.

Before Thursday’s move, Goodyear had underperformed the broad markets, with the stock down 5% year to date. Over the past 52 weeks, the stock is actually up about 5%.

Shares of Goodyear were trading up 4.5% at $32.21 on Thursday, with a consensus analyst price target of $34.33 and a 52-week trading range of $24.31 to $35.30.

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About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.