There is a lot to be liked about The Timken Company (NYSE:TKR) as an income stock. It has paid dividends over the past 10 years. The stock currently pays out a dividend yield of 2.7%, and has a market cap of US$3.2b. Does Timken tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
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5 checks you should do on a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- Has dividend per share risen in the past couple of years?
- Is is able to pay the current rate of dividends from its earnings?
- Will it be able to continue to payout at the current rate in the future?
How well does Timken fit our criteria?
The current trailing twelve-month payout ratio for the stock is 28%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 22% which, assuming the share price stays the same, leads to a dividend yield of around 2.9%. However, EPS should increase to $4.72, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. TKR has increased its DPS from $0.72 to $1.12 in the past 10 years. During this period it has not missed a payment, as one would expect for a company increasing its dividend. This is an impressive feat, which makes TKR a true dividend rockstar.
In terms of its peers, Timken has a yield of 2.7%, which is high for Machinery stocks but still below the market’s top dividend payers.
With these dividend metrics in mind, I definitely rank Timken as a strong income stock, and is worth further research for anyone who considers dividends an important part of their portfolio strategy. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. There are three pertinent aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for TKR’s future growth? Take a look at our free research report of analyst consensus for TKR’s outlook.
- Valuation: What is TKR 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 TKR is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
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 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.