Readers hoping to buy Applied Industrial Technologies, Inc. (NYSE:AIT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 13th of August, you won’t be eligible to receive this dividend, when it is paid on the 31st of August.
Applied Industrial Technologies’s next dividend payment will be US$0.32 per share, on the back of last year when the company paid a total of US$1.28 to shareholders. Calculating the last year’s worth of payments shows that Applied Industrial Technologies has a trailing yield of 1.9% on the current share price of $67.26. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
See our latest analysis for Applied Industrial Technologies
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Applied Industrial Technologies paid out 143% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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 19% of its cash flow last year.
It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Applied Industrial Technologies fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re discomforted by Applied Industrial Technologies’s 20% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Applied Industrial Technologies has delivered an average of 7.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Applied Industrial Technologies is already paying out 143% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.
The Bottom Line
Is Applied Industrial Technologies worth buying for its dividend? It’s not a great combination to see a company with earnings in decline and paying out 143% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Applied Industrial Technologies’s cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.
With that in mind though, if the poor dividend characteristics of Applied Industrial Technologies don’t faze you, it’s worth being mindful of the risks involved with this business. Case in point: We’ve spotted 5 warning signs for Applied Industrial Technologies you should be aware of.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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