Is It Smart To Buy Armstrong World Industries, Inc. (NYSE:AWI) Before It Goes Ex-Dividend?

It looks like Armstrong World Industries, Inc. (NYSE:AWI) is about to go ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Armstrong World Industries' shares before the 7th of November in order to be eligible for the dividend, which will be paid on the 21st of November.

The company's next dividend payment will be US$0.308 per share, and in the last 12 months, the company paid a total of US$1.23 per share. Last year's total dividend payments show that Armstrong World Industries has a trailing yield of 0.9% on the current share price of US$140.59. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Armstrong World Industries can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Armstrong World Industries

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Armstrong World Industries has a low and conservative payout ratio of just 20% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 31% of its free cash flow in the past year.

It's positive to see that Armstrong World Industries'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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Armstrong World Industries earnings per share are up 9.2% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Armstrong World Industries has delivered an average of 9.9% per year annual increase in its dividend, based on the past six years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Has Armstrong World Industries got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Armstrong World Industries is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Armstrong World Industries is being conservative with its dividend payouts and could still perform reasonably over the long run. Armstrong World Industries looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Armstrong World Industries for the dividends alone, you should always be mindful of the risks involved. For example - Armstrong World Industries has 1 warning sign we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.