Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BorgWarner Inc. (NYSE:BWA) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 31st of August will not receive this dividend, which will be paid on the 15th of September.
BorgWarner's upcoming dividend is US$0.17 a share, following on from the last 12 months, when the company distributed a total of US$0.68 per share to shareholders. Calculating the last year's worth of payments shows that BorgWarner has a trailing yield of 1.7% on the current share price of $41. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether BorgWarner can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. BorgWarner paid out a comfortable 31% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It distributed 31% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see BorgWarner's earnings per share have dropped 5.6% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last seven years, BorgWarner has lifted its dividend by approximately 4.5% a year on average.
Has BorgWarner got what it takes to maintain its dividend payments? BorgWarner has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. Overall, it's hard to get excited about BorgWarner from a dividend perspective.
So while BorgWarner looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 5 warning signs for BorgWarner and you should be aware of them before buying any shares.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. 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.
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