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 4 days. The ex-dividend date is one business day before a company’s record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, BorgWarner investors that purchase the stock on or after the 3rd of June will not receive the dividend, which will be paid on the 17th of June.
The company’s next dividend payment will be US$0.11 per share, and in the last 12 months, the company paid a total of US$0.44 per share. Based on the last year’s worth of payments, BorgWarner has a trailing yield of 1.2% on the current stock price of US$35.94. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether BorgWarner has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for BorgWarner
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 just 17% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 28% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s positive to see that BorgWarner’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. BorgWarner’s earnings per share have fallen at approximately 7.8% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. BorgWarner has seen its dividend decline 1.3% per annum on average over the past 10 years, which is not great to see.
To Sum It Up
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. To summarise, BorgWarner looks okay on this analysis, although it doesn’t appear a stand-out opportunity.
So while BorgWarner looks good from a dividend perspective, it’s always worthwhile being up to date with the risks involved in this stock. To help with this, we’ve discovered 2 warning signs for BorgWarner that you should be aware of before investing in their shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.