It looks like Allison Transmission Holdings, Inc. (NYSE:ALSN) is about to go ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 6th of March will not receive the dividend, which will be paid on the 20th of March.
Allison Transmission Holdings's next dividend payment will be US$0.17 per share, on the back of last year when the company paid a total of US$0.60 to shareholders. Looking at the last 12 months of distributions, Allison Transmission Holdings has a trailing yield of approximately 1.7% on its current stock price of $40.6. 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 check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Allison Transmission Holdings is paying out just 12% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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 11% 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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Allison Transmission Holdings has grown its earnings rapidly, up 31% a year for the past five years. Allison Transmission Holdings earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past eight years, Allison Transmission Holdings has increased its dividend at approximately 14% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
Has Allison Transmission Holdings got what it takes to maintain its dividend payments? Allison Transmission Holdings 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. Allison Transmission Holdings looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Wondering what the future holds for Allison Transmission Holdings? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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