BorgWarner Inc. (NYSE:BWA) has announced that it will be increasing its dividend from last year’s comparable payment on the 15th of September to $0.17. This takes the annual payment to 1.8% of the current stock price, which is about average for the industry.
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Based on the last payment, BorgWarner was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 9.9%, which makes us pretty comfortable with the sustainability of the dividend.
See our latest analysis for BorgWarner
The company’s dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was $0.52 in 2015, and the most recent fiscal year payment was $0.68. This works out to be a compound annual growth rate (CAGR) of approximately 2.7% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. BorgWarner’s earnings per share has shrunk at 14% a year over the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn’t be feeling too comfortable.
Overall, we always like to see the dividend being raised, but we don’t think BorgWarner will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would be a touch cautious of relying on this stock primarily for the dividend income.
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 4 warning signs for BorgWarner 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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