Applied Industrial Technologies' Dividend X-Ray

Before you go, we thought you'd like these...
Before you go close icon

Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and see how that's changed over the past five years.

The company we're looking at today is Applied Industrial Technologies (NYS: AIT) , which yields 2%.

Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much has it grown.


AIT Dividend Chart

AIT Dividend data by YCharts

Applied Industrial Technologies has raised its dividend every year since 2010.

Immediate safety
To understand how safe a dividend is, we use three crucial tools, the first of which is:

  • The interest coverage ratio, or the number of times interest is earned, which is calculated by earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. A ratio less than 1.5 is questionable; a number less than 1 means the company is not bringing in enough money to cover its interest expenses.

AIT Times Interest Earned TTM Chart

AIT Times Interest Earned TTM data by YCharts

The company has a very small interest expense, as it has no debt and its interest expense continues to get smaller. At 286, Applied Industrial Technologies covers every $1 in interest expense with $286 in operating earnings.

Sustainability
The other tools we use to evaluate the safety of a dividend are:

  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percentage of free cash flow devoted to paying the dividend. Again, a ratio greater than 80% could be a red flag.
anImage

Source: S&P Capital IQ.

Source: S&P Capital IQ.

Applied Industrial Technologies' earnings payout ratio jumped after the financial crisis, but it has since come back down. With both the company's earnings payout ratio and free cash flow payout ratio below 50%, you can count on this dividend.

Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.

For more dividend stock ideas, get The Motley Fool's free report, "9 Rock-Solid Dividend Stocks."

At the time this article was published FollowDan Dzombakon Twitter at@DanDzombakto check out his musings and see what articles he finds interesting. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners