Is AA plc (LON:AA.) A Smart Pick For Income Investors?
Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. AA plc (LON:AA.) has recently paid dividends to shareholders, and currently yields 1.7%. Should it have a place in your portfolio? Let’s take a look at AA in more detail.
View our latest analysis for AA
How I analyze a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
Is its annual yield among the top 25% of dividend-paying companies?
Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
Has the amount of dividend per share grown over the past?
Is its earnings sufficient to payout dividend at the current rate?
Will it be able to continue to payout at the current rate in the future?
Does AA pass our checks?
AA has a trailing twelve-month payout ratio of 27.5%, which means that the dividend is covered by earnings. In the near future, analysts are predicting lower payout ratio of 12.8%, leading to a dividend yield of 1.7%. In addition to this, EPS is also forecasted to fall to £0.074 in the upcoming year. The lower EPS on top of a lower payout ratio will lead to a fall in dividend payment moving forward.
When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. The reality is that it is too early to consider AA as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
Relative to peers, AA has a yield of 1.7%, which is on the low-side for Consumer Services stocks.
Next Steps:
After digging a little deeper into AA’s yield, it’s easy to see why you should be cautious investing in the company just for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. Below, I’ve compiled three relevant factors you should look at:
Future Outlook: What are well-informed industry analysts predicting for AA.’s future growth? Take a look at our free research report of analyst consensus for AA.’s outlook.
Valuation: What is AA. worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether AA. is currently mispriced by the market.
Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
