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Key Things To Watch Out For If You Are After ABM Industries Incorporated's (NYSE:ABM) 1.8% Dividend
Is ABM Industries Incorporated (NYSE:ABM) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.
A 1.8% yield is nothing to get excited about, but investors probably think the long payment history suggests ABM Industries has some staying power. Some simple research can reduce the risk of buying ABM Industries for its dividend - read on to learn more.
Explore this interactive chart for our latest analysis on ABM Industries!
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. ABM Industries paid out 24,757% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. ABM Industries paid out 12% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's good to see that while ABM Industries' dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Remember, you can always get a snapshot of ABM Industries' latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. ABM Industries has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was US$0.5 in 2011, compared to US$0.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.5% a year over that time.
Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
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. ABM Industries' EPS have fallen by approximately 68% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and ABM Industries' earnings per share, which support the dividend, have been anything but stable.
Conclusion
To summarise, shareholders should always check that ABM Industries' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. It's not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. Ultimately, ABM Industries comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
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. As an example, we've identified 4 warning signs for ABM Industries that you should be aware of before investing.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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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About NYSE:ABM
ABM Industries
Through its subsidiaries, engages in the provision of integrated facility, infrastructure, and mobility solutions in the United States and internationally.
Undervalued established dividend payer.