ABB (VTX:ABBN) Is Increasing Its Dividend To $0.84

ABB Ltd (VTX:ABBN) has announced that it will be increasing its dividend from last year's comparable payment on the 31st of March to $0.84. This makes the dividend yield 2.7%, which is above the industry average.

See our latest analysis for ABB

ABB Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, ABB's dividend was only 69% of earnings, however it was paying out 316% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Earnings per share is forecast to rise by 45.0% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 110%, which probably can't continue without putting some pressure on the balance sheet.

ABB Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of $0.654 in 2013 to the most recent total annual payment of $0.892. This implies that the company grew its distributions at a yearly rate of about 3.2% over that duration. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. It's encouraging to see that ABB has been growing its earnings per share at 16% a year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think ABB's payments are rock solid. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 3 warning signs for ABB that investors should take into consideration. Is ABB not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.