Why You Might Be Interested In A. O. Smith Corporation (NYSE:AOS) For Its Upcoming Dividend

It looks like A. O. Smith Corporation (NYSE:AOS) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 28th of January will not receive the dividend, which will be paid on the 16th of February.

A. O. Smith's upcoming dividend is US$0.26 a share, following on from the last 12 months, when the company distributed a total of US$1.04 per share to shareholders. Calculating the last year's worth of payments shows that A. O. Smith has a trailing yield of 1.8% on the current share price of $57.76. If you buy this business for its dividend, you should have an idea of whether A. O. Smith's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for A. O. Smith

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. A. O. Smith paid out a comfortable 49% of its profit last year. A useful secondary check can be to evaluate whether A. O. Smith generated enough free cash flow to afford its dividend. It distributed 34% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that A. O. Smith'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?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, A. O. Smith's earnings per share have been growing at 11% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. A. O. Smith has delivered an average of 23% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

From a dividend perspective, should investors buy or avoid A. O. Smith? We love that A. O. Smith is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while A. O. Smith has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 1 warning sign for A. O. Smith that you should be aware of before investing in their shares.

If you're in the market for dividend stocks, we recommend checking our list of top 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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