Last update on 2024-06-27

Arthur J. Gallagher (AJG) - Dividend Analysis (Final Score: 6/8)

Arthur J. Gallagher's dividend analysis shows a score of 6/8 based on an 8-criteria system evaluating stability, growth, and performance for investors.

Short Analysis - Dividend Score: 6

We're running Arthur J. Gallagher (AJG) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Arthur J. Gallagher (AJG) has been assessed with an 8-criteria scoring system and scored a 6 on its dividend policy performance and stability. Here's the breakdown: 1. AJG's current dividend yield of 0.9783% is higher than the industry's average of 0.63%. Though this seems low compared to its historical yields, it reflects a significant rise in AJG's stock price over the years. 2. The average dividend growth rate over 20 years is 7.0878%, which meets the desired threshold of 5%. However, there have been periods of zero or negative growth which slightly affects its attractiveness. 3. AJG's payout ratio has been fluctuating over the years. While it was below 65% in earlier years, recent years show a declining trend in the ratios, raising concerns about sustainability. 4. While AJG's dividends are generally well covered by cash flow, the consistency of this coverage over the years could be improved. 5. AJG has shown good stability in dividends with only one significant dip in 2016 but has overall managed to increase dividends steadily. 6. Consistent dividends for over 25 years indicate financial stability and commitment to returning profits to shareholders. 7. The stock repurchase trend demonstrates financial health and a commitment to enhancing shareholder value.

Insights for Value Investors Seeking Stable Income

Based on this analysis, AJG shows several strengths like a solid history of dividends and robust stock price appreciation. The dividend growth rate being higher than 5% overall is promising, and having consistently paid dividends for over 25 years is a major plus for long-term reliability. However, the fluctuation in payout ratios and the decline in coverage ratios over time could pose risks if not addressed. New investors might find the current low yield disappointing, but AJG's strong track record and financial health make it a suitable option worth considering for long-term investment. Investing in AJG might make more sense if you value a steady income and potential for capital appreciation over immediate high yields.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield indicates how much a company pays out in dividends each year relative to its share price. It's a crucial metric for income-focused investors.

Arthur J. Gallagher's (AJG) dividend yield of 0.9783% is substantially higher than the industry average of 0.63%. However, this seems lower compared to AJG's historical dividend yields which have been significantly higher in the past two decades. Previously, AJG's dividend yield has been above 3% for most years, going as high as 5.6864% in 2009. The lower current yield of 0.9783% is primarily driven by a sharp appreciation in the stock price over the years, which increased from $32.49 in 2003 to $224.88 in 2023. This stock appreciation makes the current yield appear low, despite consistent growth in dividends per share from $0.72 in 2003 to $2.20 in 2023. Though the increasing dividend payments are positive, the rapid rise in stock price has outpaced these increases, resulting in a reduced yield. For new investors, this trend may seem disappointing but it reflects robust stock price performance, which is generally a good sign.

Average annual Growth Rate higher than 5% in the last 20 years?

Criterion 1.1 evaluates whether Arthur J. Gallagher's (AJG) Dividend Growth Rate has consistently exceeded 5% over a 20-year period. A high and stable dividend growth rate signals strong financial health and a commitment to rewarding shareholders.

Arthur J. Gallagher (AJG) shows a diverse range of dividend growth rates over the last 20 years, oscillating significantly with instances of very high percentage increases such as 38.8889% in 2004 and 28.2895% in 2017. However, there were also periods with zero growth (2009, 2010), declines (-15.8974% in 2020) and stable low single-digits increases. The average dividend growth rate across 20 years is 7.0878%, which is above the 5% threshold generally desired for strong and improving dividend stocks. Despite a few years of declines or zero growth, the overall trend is positive and indicates that AJG has robust dividend growth. This is a favorable trend for the criterion, reinforcing the company’s commitment to growing shareholder returns despite economic or corporate challenges. High growth years balance out the declines making this trend solid.

Average annual Payout Ratio lower than 65% in the last 20 years?

Average Payout Ratio lower than 65% in the last 20 years?

The payout ratio is a crucial metric for investors as it indicates what portion of earnings a company is returning to its shareholders in the form of dividends. Ideally, a healthy company's payout ratio should be sustainable; usually, less than 65% is considered good as it leaves room for growth, reinvestments, and to cover dividends even in less profitable years.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings

When a company consistently covers its dividends with earnings, it indicates a healthy balance between rewarding shareholders and retaining profits for future growth. This is important because it reflects financial stability and sustainability. We compare the Earnings per Share (EPS) against Dividend per Share (DPS) to understand if the company generates enough profit to support its dividend payments without compromising its financial health. Higher coverage ratios are generally more favorable. In the case of Arthur J. Gallagher (AJG), the coverage ratio from 2003 to 2023 shows significant fluctuation. In earlier years like 2003 and 2004, the coverage ratios were approximately 45.86% and 50.25%, respectively. However, 2005 saw a substantial dip in EPS, resulting in a ratio of 350%. Throughout the decade, the trend shows alternating patterns of reduced and improved coverage. Notably, years like 2006 and 2007, with coverage ratios of 91.60% and 86.71%, indicate moderate comfort. From 2008 onwards, the EPS to DPS ratio displays mixed signals. Although 2008's ratio was 155.98%, making it an outlier due to that year's economic challenges, ratios in subsequent years like 2010's 79.70%, 2014's 73.21%, and 2018's 48.19% show AJG having less cushion for dividend payouts. More concerning is the downward trend from 2019 through 2023, with ratios around 47.83%, 41.99%, 42.91%, and 38.50%, signaling tighter profit margins concerning dividend obligations. While AJG has managed to cover its dividends most years, the overall declining trend in coverage raises concerns about its ability to sustain increasing dividends without earnings growth. The desirable situation would be a significant uptick in EPS to ensure healthier coverage ratios moving forward.

Dividends Well Covered by Cash Flow?

Explain the criterion for Arthur J. Gallagher (AJG) and why it is important to consider

Interpreting the coverage of dividends by cash flow is essential as it indicates the company's ability to sustain and potentially increase its dividend payments without sacrificing its financial health or growth opportunities. A ratio above 1 suggests that the dividends are more than covered by free cash flow, while a ratio below 1 indicates a reliance on debt or other means to cover dividends.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

The examination of dividend per share data for Arthur J. Gallagher (AJG) from 2003 to 2023 indicates a generally upward trend, which is positive. Despite this, we observe a drop in the year 2016, where the dividend per share decreased to $1.64 from $1.95 in 2015. This decline represents a drop of approximately 15.9%. Although the drop is significant, it did not exceed a decrease of 20%, aligning with the criteria for stability. The following years show a steady increase in dividend payouts again, demonstrating resilience and a strong return to growth. Therefore, AJG's dividend stability overall supports income-seeking investors.

Dividends Paid for Over 25 Years?

Explain the criterion for Arthur J. Gallagher (AJG) and why it is important to consider

Dividends Paid for Over 25 Years means the company has a record of consistently paying dividends for a long period, demonstrating financial stability and a commitment to returning profits to shareholders.

Reliable Stock Repurchases Over the Past 20 Years?

Explain the criterion for Arthur J. Gallagher (AJG) and why it is important to consider

This analysis scrutinizes the reliability of stock repurchases for Arthur J. Gallagher (AJG) over the past 20 years. The criterion measures the company's tendency to buy back shares, which typically signals strong financial health and can enhance shareholder value by reducing the number of outstanding shares. It’s vital to evaluate this trend to understand AJG's capital allocation strategy and its commitment to returning value to shareholders.