The board of Arthur J. Gallagher & Co. (NYSE:AJG) has announced that it will be increasing its dividend by 8.3% on the 21st of March to $0.65, up from last year's comparable payment of $0.60. Although the dividend is now higher, the yield is only 0.7%, which is below the industry average.

Check out our latest analysis for Arthur J. Gallagher

Arthur J. Gallagher's Projected Earnings Seem Likely To Cover Future Distributions

If it is predictable over a long period, even low dividend yields can be attractive. However, prior to this announcement, Arthur J. Gallagher's dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.

Over the next year, EPS is forecast to expand by 67.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 26%, which is in the range that makes us comfortable with the sustainability of the dividend.

Arthur J. Gallagher Has A Solid Track Record

The company has an extended history of paying stable dividends. The annual payment during the last 10 years was $1.44 in 2015, and the most recent fiscal year payment was $2.40. This works out to be a compound annual growth rate (CAGR) of approximately 5.2% a year over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Arthur J. Gallagher has seen EPS rising for the last five years, at 10% per annum. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

We should note that Arthur J. Gallagher has issued stock equal to 15% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

We Really Like Arthur J. Gallagher's Dividend

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 3 warning signs for Arthur J. Gallagher that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.