Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, BorgWarner Inc. (NYSE:BWA) has paid dividends to shareholders, and these days it yields 1.7%. Does BorgWarner tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
5 questions to ask before buying a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Is it the top 25% annual dividend yield payer?
- Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
- Has dividend per share amount increased over the past?
- Does earnings amply cover its dividend payments?
- Will the company be able to keep paying dividend based on the future earnings growth?
How does BorgWarner fare?
The current trailing twelve-month payout ratio for the stock is 15%, which means that the dividend is covered by earnings. Going forward, analysts expect BWA’s payout to remain around the same level at 15% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 1.8%. In addition to this, EPS is forecasted to fall to $4.22 in the upcoming year.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. Unfortunately, it is really too early to view BorgWarner as a dividend investment. It has only been consistently paying dividends for 6 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
Compared to its peers, BorgWarner generates a yield of 1.7%, which is on the low-side for Auto Components stocks.
Taking all the above into account, BorgWarner is a complicated pick for dividend investors given that there are a couple of positive things about it as well as negative. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. I’ve put together three pertinent factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for BWA’s future growth? Take a look at our free research report of analyst consensus for BWA’s outlook.
- Valuation: What is BWA worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether BWA is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.