We Wouldn't Be Too Quick To Buy Johnson Controls International plc (NYSE:JCI) Before It Goes Ex-Dividend

By
Simply Wall St
Published
March 15, 2021
NYSE:JCI

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Johnson Controls International plc (NYSE:JCI) is about to go ex-dividend in just three days. Ex-dividend means that investors that purchase the stock on or after the 19th of March will not receive this dividend, which will be paid on the 16th of April.

Johnson Controls International's upcoming dividend is US$0.27 a share, following on from the last 12 months, when the company distributed a total of US$1.04 per share to shareholders. Based on the last year's worth of payments, Johnson Controls International stock has a trailing yield of around 1.7% on the current share price of $61.81. If you buy this business for its dividend, you should have an idea of whether Johnson Controls International's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Johnson Controls International

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. Johnson Controls International paid out 96% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 39% of its free cash flow in the past year.

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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NYSE:JCI Historic Dividend March 15th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Johnson Controls International's earnings are down 2.7% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Johnson Controls International has delivered 7.6% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. 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.

The Bottom Line

Should investors buy Johnson Controls International for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 96% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Johnson Controls International's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Johnson Controls International is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Johnson Controls International don't faze you, it's worth being mindful of the risks involved with this business. For example - Johnson Controls International has 4 warning signs we think you should be aware of.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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