Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Applied Industrial Technologies, Inc. (NYSE:AIT) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 13th of November will not receive the dividend, which will be paid on the 30th of November.
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. Based on the last year's worth of payments, Applied Industrial Technologies stock has a trailing yield of around 1.9% on the current share price of $67.03. If you buy this business for its dividend, you should have an idea of whether Applied Industrial Technologies's dividend is reliable and sustainable. As a result, readers should always check whether Applied Industrial Technologies has been able to grow its dividends, or if the dividend might be cut.
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. An unusually high payout ratio of 245% of its profit suggests something is happening other than the usual distribution of profits to shareholders. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 16% of its free cash flow as dividends last year, which is conservatively low.
It's good to see that while Applied Industrial Technologies's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Applied Industrial Technologies's earnings per share have dropped 29% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Applied Industrial Technologies has increased its dividend at approximately 7.9% a year on average. 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 a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much 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 245% 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. Bottom line: Applied Industrial Technologies has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
So if you're still interested in Applied Industrial Technologies despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 5 warning signs for Applied Industrial Technologies you should know about.
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.
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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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