Commercial-duty transmission manufacturer Allison Transmission ALSN recently hiked its first-quarter 2025 dividend by 8% to 27 cents, which will be paid out on March 14 to shareholders of record as of March 3. This translates to a dividend yield of 1%, which might not be too tempting but is indeed sustainable with a payout ratio of around 12%. This marks the sixth straight year of dividend raise, underscoring the company’s commitment to increase shareholder returns.

In 2024, the company generated an adjusted FCF of $658 million and used a portion of this excess cash for debt repayment. It repaid more than $100 million of existing term loan debt. As of Dec. 31, 2024, ALSN’s cash/cash equivalents increased to $781 million from $555 million as of Dec. 31, 2023. Its long-term debt as of 2024-end reduced to $2.39 billion from $2.49 billion in 2023.

In addition to the dividend raise, ALSN authorized an additional $1 billion of share repurchases. In 2024, it had bought back $250 million worth of stock. Since its IPO in 2012, ALSN has repurchased more than 63% of its outstanding shares. At the end of 2024, the company had $500 million remaining under its buyback authorization. Its recent investor-friendly moves are encouraging, but are they enough to buy the stock now? Let’s find out.

Factors Working in Favor of ALSN

Last year, Allison hit record revenues of $3.2 billion, primarily on the strength of the North America on-highway end market. The company expects strong demand for Class 8 vocational vehicles to drive segmental revenues this year as well. For 2025, Allison expects net sales in the band of $3.2-$3.3 billion, driven by better price realizations and strong demand for track vehicle applications and North American vocational markets.

Allison is well-positioned to benefit from rising global defense budgets. Last year, sales in its Defense end market rose 28% year over year to a decade-high of $212 million. Thanks to the expansion of its product offerings along with prevailing geopolitical uncertainty, it expects sustained growth in this market.

Allison’s focus on innovation and advanced technology is unlocking new growth opportunities. Its fully automatic transmissions, including FracTran, TerraTran and the 3414 RHS, along with electrification and fuel-cell solutions, position it for future demand. The company’s partnership with XCMG strengthens its mining and construction prospects, while its eGen Power, eGen Flex and eGen Force portfolios highlight adaptability to industry shifts.

Internationally, Allison’s expansion into Brazil’s ag sprayer market and partnerships with Yutong, LGMG and SANY bolster its presence in Africa, Asia and South America, reinforcing its global growth strategy.

Risks in ALSN’s Path

Allison’s R&D expenses rose about 3% in 2024 due to increased spending on product initiatives. This trend is expected to continue in 2025 as the company invests in developing products across various markets. While these investments support long-term growth, they could weigh on short-term profitability.

Inflationary pressures have also led to higher costs for raw materials, labor, energy, freight and logistics. Inflation still remains sticky and the company might struggle to fully pass on these costs through price increases, impacting profitability.

Additionally, geopolitical risks, supply chain disruptions, labor shortages and energy constraints continue to create economic uncertainty. The commercial vehicle industry, in particular, tends to be more vulnerable to economic downturns than other sectors. Amid any economic slowdown, demand for commercial vehicles could decline, challenging Allison’s growth.

What Do Our Estimates for ALSN Say?

The Zacks Consensus Estimate of Allison’s 2025 sales and EPS implies a year-over-year increase of 1.4% and 9%, respectively. For 2026, sales and EPS estimates point to an uptick of another 8% and 11%, respectively, from the projected 2025 figures.

That said, EPS estimates for the first two quarters of 2025 as well as full-year 2025 and next year have moved south over the past 30 days.

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ALSN’s Price Performance & Valuation

On a year-to-date basis, Allison shares have declined 7%, underperforming industry and S&P 500 as well as its close peers Caterpillar CAT, Dana DAN and Volvo Group VLVLY.

YTD Price Performance Comparison

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On the valuation front, it is currently trading at a forward sales multiple of 2.55X, higher than Volvo and Dana but at similar levels as CAT. The industry is also trading at a lower sales multiple of 2.1X.

Relatively Richer Valuation

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How to Play ALSN Stock

Allison’s strong financial position, record revenues and shareholder-friendly moves are encouraging. Its expansion into new markets and focus on innovation support long-term growth. However, near-term challenges like rising R&D costs, inflationary pressure and economic uncertainty could weigh on profitability. With earnings estimates movement not so encouraging and a valuation that is higher than industry and most peers, waiting for a better entry point may be prudent.

ALSN currently has an average brokerage recommendation (ABR) of 3 on a scale of 1 to 5 (Buy to Strong Sell). Of the eight brokers covering ALSN, four rate it a “Hold,” two call it a “Strong Buy/Buy,” and two a “Sell/Strong Sell.”

Allison currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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