Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see A. O. Smith Corporation (NYSE:AOS) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 29th of October in order to receive the dividend, which the company will pay on the 16th of November.
A. O. Smith's next dividend payment will be US$0.26 per share, and in the last 12 months, the company paid a total of US$0.96 per share. Based on the last year's worth of payments, A. O. Smith has a trailing yield of 1.9% on the current stock price of $54.93. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. A. O. Smith paid out more than half (51%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether A. O. Smith generated enough free cash flow to afford its dividend. Fortunately, it paid out only 35% of its free cash flow in the past year.
It's positive to see that A. O. Smith'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.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see A. O. Smith earnings per share are up 9.8% per annum over the last five years. Decent historical earnings per share growth suggests A. O. Smith has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. A. O. Smith has delivered an average of 23% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Should investors buy A. O. Smith for the upcoming dividend? While earnings per share growth has been modest, A. O. Smith's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. In summary, it's hard to get excited about A. O. Smith from a dividend perspective.
So while A. O. Smith looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, we've found 1 warning sign for A. O. Smith that we recommend you consider before investing in the business.
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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