Is Allison Transmission Holdings, Inc. (NYSE:ALSN) An Attractive Dividend Stock?

Is Allison Transmission Holdings, Inc. (NYSE:ALSN) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With a 1.2% yield and a eight-year payment history, investors probably think Allison Transmission Holdings looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. The company also bought back stock during the year, equivalent to approximately 8.4% of the company’s market capitalisation at the time. Some simple research can reduce the risk of buying Allison Transmission Holdings for its dividend – read on to learn more.

Explore this interactive chart for our latest analysis on Allison Transmission Holdings!

NYSE:ALSN Historical Dividend Yield, January 18th 2020
NYSE:ALSN Historical Dividend Yield, January 18th 2020

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 12% of Allison Transmission Holdings’s profits were paid out as dividends in the last 12 months. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Allison Transmission Holdings’s cash payout ratio last year was 10%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It’s positive to see that Allison Transmission Holdings’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.

Is Allison Transmission Holdings’s Balance Sheet Risky?

As Allison Transmission Holdings has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With net debt of 2.17 times its EBITDA, Allison Transmission Holdings’s debt burden is within a normal range for most listed companies.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Net interest cover of 7.48 times its interest expense appears reasonable for Allison Transmission Holdings, although we’re conscious that even high interest cover doesn’t make a company bulletproof.

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

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for Allison Transmission Holdings, in the last decade, was eight years ago. The company has been paying a stable dividend for a while now, which is great. However we’d prefer to see consistency for a few more years before giving it our full seal of approval. During the past eight-year period, the first annual payment was US$0.24 in 2012, compared to US$0.60 last year. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time.

We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Allison Transmission Holdings has grown its earnings per share at 42% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.

Conclusion

To summarise, shareholders should always check that Allison Transmission Holdings’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Allison Transmission Holdings has low and conservative payout ratios. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Overall we think Allison Transmission Holdings scores well on our analysis. It’s not quite perfect, but we’d definitely be keen to take a closer look.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 15 Allison Transmission Holdings analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.