Johnson Controls International plc (NYSE:JCI) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 25th of September will not receive the dividend, which will be paid 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. Calculating the last year's worth of payments shows that Johnson Controls International has a trailing yield of 2.4% on the current share price of $42.78. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher 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. Over the last year it paid out 74% of its free cash flow as dividends, within the usual 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 the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Johnson Controls International's 13% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Johnson Controls International has delivered an average of 7.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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 99% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Should investors buy Johnson Controls International for the upcoming dividend? Earnings per share have been in decline, which is not encouraging. 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. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
With that being said, if you're still considering Johnson Controls International as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 4 warning signs for Johnson Controls International that we strongly recommend you have a look at before investing in the company.
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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