Stock Analysis

Allegion plc (NYSE:ALLE) Has Got What It Takes To Be An Attractive Dividend Stock

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NYSE:ALLE
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Could Allegion plc (NYSE:ALLE) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a 1.1% yield and a seven-year payment history, investors probably think Allegion looks like a reliable dividend stock. A 1.1% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock during the year, equivalent to approximately 1.8% of the company's market capitalisation at the time. There are a few simple ways to reduce the risks of buying Allegion for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Allegion!

historic-dividend
NYSE:ALLE Historic Dividend April 6th 2021

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 38% of Allegion's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Of the free cash flow it generated last year, Allegion paid out 26% as dividends, suggesting the dividend is affordable. It's positive to see that Allegion's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

We update our data on Allegion every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Allegion has been paying a dividend for the past seven years. The dividend has been quite stable over the past seven years, which is great to see - although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past seven-year period, the first annual payment was US$0.3 in 2014, compared to US$1.4 last year. Dividends per share have grown at approximately 24% per year over this time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. It's good to see Allegion has been growing its earnings per share at 16% a year over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's great to see that Allegion is paying out a low percentage of its earnings and cash flow. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Allegion performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Allegion that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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What are the risks and opportunities for Allegion?

Allegion plc manufactures and sells mechanical and electronic security products and solutions worldwide.

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Rewards

  • Earnings are forecast to grow 10.73% per year

Risks

  • Debt is not well covered by operating cash flow

  • Significant insider selling over the past 3 months

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