Yahoo Finance Why It Might Not Make Sense To Buy Applied Industrial Technologies, Inc. (NYSE:AIT) For Its Upcoming Dividend
Applied Industrial Technologies, Inc. (NYSE:AIT) is about to trade ex-dividend in the next three days. If you purchase the stock on or after the 13th of August, you won't be eligible to receive this dividend, when it is paid on the 31st of August.
Applied Industrial Technologies's next dividend payment will be US$0.32 per share, and in the last 12 months, the company paid a total of US$1.28 per share. Last year's total dividend payments show that Applied Industrial Technologies has a trailing yield of 1.9% on the current share price of $67.26. If you buy this business for its dividend, you should have an idea of whether Applied Industrial Technologies's dividend is reliable and sustainable. So we need to investigate whether Applied Industrial Technologies can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Applied Industrial Technologies
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. Applied Industrial Technologies distributed an unsustainably high 143% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. It paid out 19% of its free cash flow as dividends last year, which is conservatively low.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Applied Industrial Technologies fortunately did generate enough cash to fund its dividend. 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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Applied Industrial Technologies's earnings per share have dropped 20% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. 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.
Final Takeaway
Should investors buy Applied Industrial Technologies for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 143% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think Applied Industrial Technologies is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
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. In terms of investment risks, we've identified 5 warning signs with Applied Industrial Technologies and understanding them should be part of your investment process.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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