A.O. Smith Corp. (NYSE:AOS): A Dividend Stock Built on Profitability and Financial Strength

For investors looking for a dependable source of passive income, a systematic screening method is needed to distinguish truly lasting dividend payers from risky high-yield stocks. One useful technique is to concentrate on companies that provide a good dividend and are also fundamentally strong. This means selecting for stocks with a high dividend rating, which assesses yield, growth, and sustainability, while also demanding adequate scores for profitability and financial soundness. This detailed method helps find businesses with the earning capacity to keep and increase their dividends and the balance sheet fortitude to endure economic slumps, building a solid base for a long-term dividend portfolio.

An Examination of A.O. Smith

Using this method recently identified SMITH (A.O.) CORP (NYSE:AOS), a top producer of water heating and treatment equipment. The company’s fundamental picture, especially its dividend traits supported by good operational measures, makes it an interesting option for investors focused on income.

Dividend Profile: Dependability and Increase

The center of the investment case for AOS is its respected dividend, which receives a ChartMill Dividend Rating of 7 out of 10. This rating combines a number of important elements that dividend investors value.

• Lasting Payout: The company distributes about 36.7% of its earnings as dividends. This is a cautious and lasting payout ratio, keeping a large part of profits to be put back into the business or saved as a cushion. It shows the dividend is not at direct risk even if earnings face short-term strain.
• History of Increase: AOS has built a dependable history of giving capital back to shareholders. It has paid a dividend for at least ten years without a decrease, establishing a record of dedication. Also, the dividend has risen at a good yearly rate of about 7.65% over the last five years, aiding investors against inflation.
• Good Yield: With a present yield near 2.15%, AOS provides a benefit compared to the average yield of its industry group (about 0.73%) and is good relative to the wider S&P 500. For investors, this means the income produced is notable within its sector.

The Foundational Support: Profitability and Financial Soundness

A good dividend is only as strong as the company behind it. This is where the screening rules for "adequate profitability and soundness" show their value, and AOS performs well on both counts with ChartMill ratings of 9 and 8, in order.

Profitability Quality: The company’s high profitability score is not by chance. It shows outstanding efficiency in using its capital.

• Return on Invested Capital (ROIC) of almost 24% is with the best in its industry, showing management’s ability at creating profits from its investments.
• Good margins, including an operating margin over 19%, show the company has pricing ability and cost management, supplying a lasting flow of earnings from which dividends are paid.

Financial Soundness: A strong balance sheet makes sure the company can maintain its operations and its dividend through economic periods.

• AOS keeps a very low debt-to-equity ratio of 0.09 and could settle all its debt with under four months of free cash flow, showing outstanding solvency.
• While its short-term liquidity measures (Current and Quick Ratio) are points to note, they are judged alongside its excellent solvency and high profitability, which greatly reduce near-term liquidity worries.

These elements are important for the dividend plan. High profitability ensures the cash for dividends is being created efficiently, while a strong financial state means the company is not likely to be made to cut its payout to handle debt or survive a slump.

Valuation and Growth Points

The screening method correctly places dividend lasting power above fast growth, and AOS matches that picture. Its valuation seems fair, trading at a small discount to the S&P 500 based on forward earnings estimates. However, growth is moderate. Revenue and earnings are projected to rise in the low-to-mid single digits each year. For a dividend investor, this is an acceptable balance: the focus is on the dependable and rising income stream supported by a very stable business, not on high price increase. The company’s exceptional profitability may support its current valuation multiple for investors seeking quality and yield.

Conclusion

A.O. Smith Corp. shows the kind of company a systematic dividend screening method tries to find. It provides a attractive, well-supported, and rising dividend yield. Importantly, this payout is supported by first-class profitability measures and a very sound balance sheet, which together create a safety buffer for income investors. It represents a "steady" investment, a company in a necessary industry (water heating) with a history of benefiting shareholders and the financial strength to keep doing so.

For investors aiming to create or add to a dividend portfolio, AOS deserves more study. A complete outline of its fundamental ratings, including the dividend, profitability, and soundness reviews, can be seen in its full ChartMill Fundamental Report.

Find More Dividend Options The hunt for quality dividend payers does not stop here. You can use the same "Best Dividend" screen that found AOS to look at other companies that meet similar standards for high dividend quality, profitability, and financial soundness. Click here to view the screen and see the present results.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented is based on data provided and is believed to be reliable, however, its accuracy or completeness is not guaranteed. Investing involves risk, including the potential loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.