Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Historically, Aristocrat Leisure Limited (ASX:ALL) has paid a dividend to shareholders. It currently yields 1.5%. Does Aristocrat Leisure tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
5 questions I ask before picking a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Is their annual yield among the top 25% of dividend payers?
- Has it paid dividend every year without dramatically reducing payout in the past?
- Has it increased its dividend per share amount over the past?
- Can it afford to pay the current rate of dividends from its earnings?
- Will it have the ability to keep paying its dividends going forward?
How well does Aristocrat Leisure fit our criteria?
The current trailing twelve-month payout ratio for the stock is 50%, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect ALL’s payout to fall to 41% of its earnings, which leads to a dividend yield of around 2.5%. However, EPS should increase to A$1.11, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Not only have dividend payouts from Aristocrat Leisure fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. These characteristics do not bode well for income investors seeking reliable stream of dividends.
In terms of its peers, Aristocrat Leisure has a yield of 1.5%, which is on the low-side for Hospitality stocks.
After digging a little deeper into Aristocrat Leisure’s yield, it’s easy to see why you should be cautious investing in the company just for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three important aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for ALL’s future growth? Take a look at our free research report of analyst consensus for ALL’s outlook.
- Valuation: What is ALL worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ALL is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.