Owners of Sturm, Ruger & Co. (NYSE: RGR) may feel safer owning one of the company’s guns than the stock because investors are staring down the barrel of a dividend cut.

The gunmaker’s revenue dropped by 18% in 2022 due to discounts and rebates by competitors and an increase in used gun sales.

As a result of lower sales and profit, free cash flow fell off a cliff to $49.5 million last year, down from $143.6 million in 2021.

In 2022, Sturm, Ruger & Co. paid shareholders 86% of free cash flow. This year, I estimate the payout ratio will rise to nearly 95%. That’s redlining the payout ratio.

I want to see the payout ratio at 75% or lower to ensure that a company doesn’t have to cut its dividend if free cash flow slips.

It’s important to note that Sturm, Ruger & Co. has a variable dividend. It aims to pay out 40% of net income in dividends, and that’s why there have been so many dividend raises and cuts over the past 10 years.

The most recently declared dividend is $0.42 per share, which is up a penny from last quarter’s but down 56% from the dividend a year ago. That said, the company paid a $5 per share special dividend in the fourth quarter of 2022. It did the same in August 2020.

Most financial websites will show Sturm, Ruger & Co.’s dividend yield as 4% or 3.3% depending on whether the site used the $0.42 per share dividend that was declared last week.

If you annualize the $0.42, it comes out to only a 2.8% yield.

We know that the company’s dividend is variable, so it has a very strong chance of being reduced in any given quarter. And considering that revenue and free cash flow are expected to decline in 2023, I suspect the dividend is in serious jeopardy of being lowered again in the next 12 months or so.

Dividend Safety Rating: F

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