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Should Allegiant Travel Company (NASDAQ:ALGT) Be Part Of Your Dividend Portfolio?

Simply Wall St

Is Allegiant Travel Company (NASDAQ:ALGT) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a 2.0% yield and a six-year payment history, investors probably think Allegiant Travel looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. There are a few simple ways to reduce the risks of buying Allegiant Travel for its dividend, and we'll go through these below.

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NasdaqGS:ALGT Historical Dividend Yield, August 16th 2019

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Allegiant Travel paid out 25% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Allegiant Travel pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

Consider getting our latest analysis on Allegiant Travel's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Allegiant Travel has been paying a dividend for the past six years. It's good to see that Allegiant Travel has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was US$2.25 in 2013, compared to US$2.80 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.7% a year over that time. The dividends haven't grown at precisely 3.7% every year, but this is a useful way to average out the historical rate of growth.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's good to see Allegiant Travel has been growing its earnings per share at 19% a year over the past 5 years. Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Conclusion

To summarise, shareholders should always check that Allegiant Travel's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Allegiant Travel has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. In sum, we find it hard to get excited about Allegiant Travel from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 12 analysts we track are forecasting for Allegiant Travel for free with public analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.