BorgWarner Inc. (NYSE:BWA) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 30th of August will not receive this dividend, which will be paid on the 16th of September.
BorgWarner's next dividend payment will be US$0.17 per share, on the back of last year when the company paid a total of US$0.68 to shareholders. Looking at the last 12 months of distributions, BorgWarner has a trailing yield of approximately 2.2% on its current stock price of $30.88. If you buy this business for its dividend, you should have an idea of whether BorgWarner's dividend is reliable and sustainable. As a result, readers should always check whether BorgWarner has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. BorgWarner has a low and conservative payout ratio of just 18% of its income after tax. A useful secondary check can be to evaluate whether BorgWarner generated enough free cash flow to afford its dividend. It paid out 18% of its free cash flow as dividends last year, which is conservatively low.
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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at BorgWarner, with earnings per share up 6.3% on average over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. If profits are reinvested effectively, this could be a bullish combination for future earnings and dividends.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, BorgWarner has lifted its dividend by approximately 12% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Should investors buy BorgWarner for the upcoming dividend? Earnings per share growth has been growing somewhat, and BorgWarner is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and BorgWarner is halfway there. BorgWarner looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Curious what other investors think of BorgWarner? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
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.
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