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Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, AZZ Inc. (NYSE:AZZ) has paid dividends to shareholders, and these days it yields 1.7%. Does AZZ tick all the boxes of a great dividend stock? Below, I'll take you through my analysis.
How I analyze a dividend stock
Whenever I am looking at a potential dividend stock investment, I always check these five 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?
- Does earnings amply cover its dividend payments?
- Will the company be able to keep paying dividend based on the future earnings growth?
Does AZZ pass our checks?
AZZ has a trailing twelve-month payout ratio of 27%, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect AZZ's payout to fall to 23% of its earnings. Assuming a constant share price, this equates to a dividend yield of 1.7%. Furthermore, EPS is also forecasted to fall to $2.42 in the upcoming year. The lower EPS on top of a lower payout ratio will lead to a fall in dividend payment moving forward.
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 there's one type of stock you want to be reliable, it's dividend stocks and their stable income-generating ability. Unfortunately, it is really too early to view AZZ as a dividend investment. It has only been consistently paying dividends for 9 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
In terms of its peers, AZZ produces a yield of 1.7%, which is on the low-side for Electrical stocks.
Whilst there are few things you may like about AZZ from a dividend stock perspective, the truth is that overall it probably is not the best choice for a dividend investor. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. 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. Below, I've compiled three important factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for AZZ’s future growth? Take a look at our free research report of analyst consensus for AZZ’s outlook.
- Valuation: What is AZZ 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 AZZ 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.
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.