Allison Transmission Holdings, Inc. (NYSE:ALSN) stock is about to trade ex-dividend in 3 days. This means that investors who purchase shares on or after the 14th of May will not receive the dividend, which will be paid on the 28th of May.

Allison Transmission Holdings's next dividend payment will be US$0.19 per share, and in the last 12 months, the company paid a total of US$0.76 per share. Based on the last year's worth of payments, Allison Transmission Holdings stock has a trailing yield of around 1.7% on the current share price of $45.08. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Allison Transmission Holdings can afford its dividend, and if the dividend could grow.

View our latest analysis for Allison Transmission Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Allison Transmission Holdings's payout ratio is modest, at just 28% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 19% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that Allison Transmission Holdings'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?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Allison Transmission Holdings's earnings per share have risen 19% per annum over the last five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, nine years ago, Allison Transmission Holdings has lifted its dividend by approximately 14% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Should investors buy Allison Transmission Holdings for the upcoming dividend? We love that Allison Transmission Holdings is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Overall we think this is an attractive combination and worthy of further research.

So while Allison Transmission Holdings looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 3 warning signs for Allison Transmission Holdings and you should be aware of these before buying any shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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.

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