Readers hoping to buy Allison Transmission Holdings, Inc. (NYSE:ALSN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 22nd of August to receive the dividend, which will be paid on the 30th of August.
Allison Transmission Holdings's next dividend payment will be US$0.15 per share, and in the last 12 months, the company paid a total of US$0.60 per share. Last year's total dividend payments show that Allison Transmission Holdings has a trailing yield of 1.4% on the current share price of $43.08. If you buy this business for its dividend, you should have an idea of whether Allison Transmission Holdings's dividend is reliable and sustainable. So we need to investigate whether Allison Transmission Holdings can afford its dividend, and if the dividend could grow.
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. Allison Transmission Holdings paid out just 11% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 9.7% of its cash flow last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Allison Transmission Holdings's earnings have been skyrocketing, up 44% per annum for the past five years. Allison Transmission Holdings looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Allison Transmission Holdings has delivered 14% dividend growth per year on average over the past 7 years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
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.
Ever wonder what the future holds for Allison Transmission Holdings? See what the 15 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.