Readers hoping to buy Johnson Controls International plc (NYSE:JCI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 25th of September in order to receive the dividend, which the company will pay on the 16th of October.
Johnson Controls International's next dividend payment will be US$0.26 per share. Last year, in total, the company distributed US$1.04 to shareholders. Looking at the last 12 months of distributions, Johnson Controls International has a trailing yield of approximately 2.4% on its current stock price of $42.78. If you buy this business for its dividend, you should have an idea of whether Johnson Controls International's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year Johnson Controls International paid out 99% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (74%) of its free cash flow in the past year, which is within an average range for most companies.
It's good to see that while Johnson Controls International's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Johnson Controls International's earnings per share have fallen at approximately 13% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Johnson Controls International has lifted its dividend by approximately 7.2% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Johnson Controls International is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
From a dividend perspective, should investors buy or avoid Johnson Controls International? It's never fun to see a company's earnings per share in retreat. Additionally, Johnson Controls International is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. Bottom line: Johnson Controls International has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Johnson Controls International. For example, Johnson Controls International has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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.
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. 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.
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