Sturm, Ruger (NYSE:RGR) investors might have been surprised to see that even though the company's fiscal third-quarter firearms sales jumped 22% year over year and per-share profits were 42% higher, management slashed the dividend 21% from just one quarter ago.

While the white-hot growth rate in gun sales has ebbed in recent months, they still remain on track to have 2021 rank second only to last year as the best year for firearms sales. But the dramatic decline in the payout was expected, and it's not as bad as you might think.

Woman shooting handgun at firing range

Image source: Getty Images.

Still on target for growth

Ruger's business is still growing, though there was a sequential decline. Revenue of $147.1 million was down 11% from the fiscal second quarter, while earnings declined 21%. 

There were three reasons the company saw a slowdown in its business and profits:

  • It closed its factories for a week in July for a "very well deserved" break, naturally causing a downturn in production.
  • COVID cases tripled during the quarter as the delta variant spread, exacerbating the production shortfall.
  • The overall growth of the firearms market took a breather.

The FBI reports that the number of criminal background checks it conducted through its National Instant Criminal Background Check System (NICS) in October came in at just under 2.6 million, the lowest amount in 2021 and down 22% year to date.

Even when adjusted by the National Shooting Sports Foundation to remove duplicate checks, they were down 19% year over year.

Still, the 1.4 million adjusted checks performed in October is only surpassed by last year as the most ever for that month, and you can see below how checks trended higher through the end of 2020.

Chart of adjusted criminal background checks 2019 to 2021

Data source: National Shooting Sports Foundation. Chart by author.

A solid payout

So why such a drastic cut to Ruger's dividend? Because the payout is based on a percentage of earnings, or about 40% of the gunmaker's net income. It will vary every quarter, which is why I advised investors to not be so enamored when Ruger's dividend doubled earlier this year. The payout could rise or fall over the coming quarters, I wrote, "but it undoubtedly won't be the same."

While Ruger has paid a dividend for many years, rival Smith & Wesson Brands initiated its first dividend last year, after it spun off American Outdoor Brands as a standalone business. But its payout is more conventional with a set amount every quarter.

Yet where Smith & Wesson's dividend currently yields about 1.4% annually, Ruger's yields 5.5%, and both are better than the average S&P 500 yield of 1.3%.

A discounted stock

Investors were bracing for decelerating growth at Sturm, Ruger after Smith & Wesson reported its fiscal 2022 first-quarter results in September, and the FBI released its background check data last month showing the ebbing tide of demand.

Yet the firearms industry remains as healthy as ever, if not more so. Just because sales aren't rising at the same rate they were during the greatest gun bull market of all time doesn't mean the industry is struggling.

Sturm, Ruger is also healthy, and its stock trades at just 9.4 times trailing earnings, 8.6 forward earnings estimates, and 11.6 times trailing free cash flow. It's an affordable sporting-goods stock in a market full of sky-high valuations. This latest dividend reduction is nothing investors should be worrying about.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.