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Today we'll take a closer look at The Greenbrier Companies, Inc. (NYSE:GBX) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
In this case, Greenbrier Companies likely looks attractive to dividend investors, given its 4.1% dividend yield and six-year payment history. It sure looks interesting on these metrics - but there's always more to the story . Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Greenbrier Companies paid out 54% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Greenbrier Companies paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
Is Greenbrier Companies's Balance Sheet Risky?
As Greenbrier Companies has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. Greenbrier Companies has net debt of 2.27 times its EBITDA. Using debt can accelerate business growth, but also increases the risks.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Interest cover of 4.78 times its interest expense is starting to become a concern for Greenbrier Companies, and be aware that lenders may place additional restrictions on the company as well.
Remember, you can always get a snapshot of Greenbrier Companies's latest financial position, by checking our visualisation of its financial health.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that Greenbrier Companies has been paying a dividend for the past six years. The company has been paying a stable dividend for a while now, which is great. However we'd prefer to see consistency for a few more years before giving it our full seal of approval. During the past six-year period, the first annual payment was US$0.60 in 2014, compared to US$1.08 last year. Dividends per share have grown at approximately 10% per year over this time.
We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Greenbrier Companies's earnings per share have shrunk at 14% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Greenbrier Companies's earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Greenbrier Companies's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Greenbrier Companies has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. Using these criteria, Greenbrier Companies looks quite suboptimal from a dividend investment perspective.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 6 analysts we track are forecasting for the future.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.
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