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A. O. Smith Corporation (NYSE:AOS) Passed Our Checks, And It's About To Pay A US$0.24 Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see A. O. Smith Corporation (NYSE:AOS) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 30th of January, you won't be eligible to receive this dividend, when it is paid on the 18th of February.

A. O. Smith's next dividend payment will be US$0.24 per share. Last year, in total, the company distributed US$0.96 to shareholders. Last year's total dividend payments show that A. O. Smith has a trailing yield of 2.1% on the current share price of $45.43. If you buy this business for its dividend, you should have an idea of whether A. O. Smith's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for A. O. Smith

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. A. O. Smith paid out a comfortable 36% of its profit last year. 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. Fortunately, it paid out only 41% of its free cash flow in the past 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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NYSE:AOS Historical Dividend Yield, January 25th 2020

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see A. O. Smith has grown its earnings rapidly, up 21% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, A. O. Smith has lifted its dividend by approximately 22% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

From a dividend perspective, should investors buy or avoid A. O. Smith? A. O. Smith has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Overall we think this is an attractive combination and worthy of further research.

Ever wonder what the future holds for A. O. Smith? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.