Short answer:
Based solely on the brief Business Wire announcement that Watts Water Technologies, Inc. (ticker WTS) has declared a quarterly dividend, we do not have enough quantitative information to determine whether the payout ratio is sustainable. A proper assessment requires looking at the company’s recent earnings, free‑cash‑flow generation, dividend history, capital‑expenditure needs, debt profile, and management’s guidance—all of which are not disclosed in the news release.
Below is a step‑by‑step framework you can use to evaluate the sustainability of Watts Water’s dividend payout ratio, together with the specific data points you’ll need to collect and the key considerations for each.
1. Gather the Core Numbers
| Metric | Where to Find It | How to Calculate (if not directly reported) |
|---|---|---|
| Quarterly dividend per share (DPS) | Press release, Form 8‑K, or Investor Relations page | Usually stated in the announcement |
| Annualized dividend per share | DPS × 4 (if the dividend is paid quarterly) | |
| Earnings per share (EPS) | 10‑Q (quarterly) or 10‑K (annual) | Net income ÷ diluted shares outstanding |
| Net income | Income statement in 10‑Q/10‑K | |
| Free cash flow (FCF) | Cash‑flow statement: Operating cash flow – Capital expenditures (CapEx) | |
| Dividend payout ratio (based on earnings) | (Annual dividend ÷ Net income) × 100% | |
| Dividend payout ratio (based on cash) | (Annual dividend ÷ Free cash flow) × 100% | |
| Debt levels & interest coverage | Balance sheet & income statement | Debt/EBITDA, Interest expense ÷ EBIT |
| Growth capital needs | Management discussion, CapEx outlook, R&D spend | Qualitative and quantitative assessment |
Key filings to review:
- Form 10‑Q for the most recent quarter (likely Q2 2025, given the Aug 5 2025 announcement)
- Form 10‑K for FY 2024 and FY 2025 (if already filed)
- Earnings press releases and conference‑call transcripts (usually provide forward‑looking statements about cash flow and capex)
- Investor presentations (often include a “Dividend Sustainability” slide)
2. Calculate the Current Payout Ratios
Earnings‑based payout
[
\text{Payout}_{\text{EPS}} = \frac{\text{Annualized Dividend per Share}}{\text{EPS}} \times 100\%
]Cash‑based payout (more conservative)
[
\text{Payout}_{\text{FCF}} = \frac{\text{Annualized Dividend per Share}}{\text{Free Cash Flow per Share}} \times 100\%
]
If the cash‑based ratio is substantially higher than the earnings‑based ratio, the dividend may be relying on non‑recurring cash or asset sales.
3. Benchmark the Ratios
| Category | Typical Sustainable Range* |
|---|---|
| Earnings‑based payout | 30 % – 60 % for mature, cash‑generating industrials |
| Cash‑based payout | 30 % – 50 % (free cash flow is the “real” cushion) |
| Debt‑to‑EBITDA | < 3.0× is generally comfortable |
| Interest coverage | > 5× is a good safety net |
*These ranges are industry‑wide guidelines; specific company strategy, growth stage, and capital‑intensive needs can shift the comfort zone.
4. Qualitative Factors That Influence Sustainability
| Factor | Why It Matters | What to Look For |
|---|---|---|
| Historical dividend track record | Consistency signals confidence; abrupt cuts are red flags | Has WTS increased/dividended for several years? Any recent cuts? |
| Management’s dividend policy | Some firms target a fixed payout ratio; others prioritize growth | Look for statements like “we aim for a 45 % payout” |
| Future earnings outlook | If earnings are expected to rise, a higher payout can be sustainable | Guidance in earnings calls, analyst estimates, consensus EPS growth |
| Capital‑expenditure (CapEx) roadmap | Heavy upcoming CapEx can pressure cash flow | Planned investments in product lines, acquisitions, or plant upgrades |
| Acquisition activity / debt refinancing | Large deals may consume cash or increase leverage | Recent press releases on M&A, debt issuance |
| Industry cyclicality | Water‑treatment markets are relatively defensive but can be impacted by construction cycles, regulatory changes | Macro trends, building‑construction outlook, water‑infrastructure spending |
5. Putting It All Together – A Sample “What‑If” Illustration
(Note: The numbers below are *illustrative only** and do not reflect actual WTS data.)*
| Metric | Sample Value |
|---|---|
| Quarterly DPS | $0.25 |
| Annualized dividend | $1.00 |
| EPS (Q2 2025) | $2.10 |
| Annualized EPS (proj.) | $8.40 |
| Free cash flow per share (Q2 2025) | $1.20 |
| Annualized FCF per share | $4.80 |
| Debt/EBITDA | 2.4× |
| Interest coverage | 7.2× |
Calculated ratios:
- Earnings‑based payout = $1.00 ÷ $8.40 ≈ 12 %
- Cash‑based payout = $1.00 ÷ $4.80 ≈ 21 %
Both ratios lie well below typical “comfort” thresholds, suggesting ample cushion for the dividend. Coupled with a modest debt load and strong interest coverage, the dividend would appear highly sustainable in this scenario.
If the actual numbers instead produced a payout close to or above 50 % of earnings or cash, you would need to examine whether:
- Earnings are volatile (e.g., dependent on a few large contracts),
- Free cash flow is seasonal or being boosted by one‑time items,
- The company is in a growth phase that requires reinvestment,
- Management has explicitly signaled that the dividend is a “special” or “temporary” distribution.
6. Practical Next Steps for You
Download the latest Form 10‑Q (likely filed in early August 2025).
- Locate the “Consolidated Statements of Cash Flows” for FCF.
- Note the net income and diluted shares for EPS.
- Locate the “Consolidated Statements of Cash Flows” for FCF.
Check the press release (the Business Wire announcement) for the exact dividend amount per share and the payment dates.
Compute the two payout ratios (earnings‑based and cash‑based) using the formulas above.
Compare the results to the benchmark ranges and to WTS’s historical ratios (often disclosed in the “Dividends” section of the 10‑K or 10‑Q).
Read the Management Discussion & Analysis (MD&A) for any forward‑looking statements about:
- Expected earnings growth,
- CapEx plans for the next 12‑24 months,
- Debt repayment or refinancing,
- Any “special dividend” language.
Cross‑check analyst reports (e.g., from Bloomberg, FactSet, or brokerage houses) for consensus payout‑ratio expectations and any “dividend sustainability” notes.
Monitor the next earnings call (usually within a month of the dividend declaration) for any hints that the board might adjust the payout policy.
7. Bottom‑Line Takeaway
- The news release alone does not provide enough data to judge sustainability.
- Sustainability hinges on the relationship between the dividend amount and the company’s cash‑generating ability (free cash flow) as well as its earnings consistency and capital‑expenditure needs.
- If WTS’s free cash flow comfortably exceeds the annualized dividend by a healthy margin (typically > 30 % coverage), and the payout ratio remains within the 30‑60 % earnings‑based range, the dividend is likely sustainable.
- Conversely, a payout ratio approaching or exceeding 70 % of earnings or 50 % of free cash flow, especially in a high‑debt or high‑capex environment, would raise concerns.
Action: Retrieve the latest quarterly financial statements, compute the payout ratios, and compare them against the industry‑standard thresholds and WTS’s own historical trends. That quantitative analysis—combined with the qualitative context from management commentary—will give you a solid answer to whether Watts Water Technologies’ dividend payout ratio is sustainable.