Is Johnson Controls International plc (NYSE:JCI) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A 1.7% yield is nothing to get excited about, but investors probably think the long payment history suggests Johnson Controls International has some staying power. The company also bought back stock equivalent to around 4.1% of market capitalisation this year. There are a few simple ways to reduce the risks of buying Johnson Controls International for its dividend, and we'll go through these 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. Johnson Controls International paid out 96% of its profit as dividends, over the trailing twelve month period. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Johnson Controls International's cash payout ratio in the last year was 39%, which suggests dividends were well covered by cash generated by the business. 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 free cash flow 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.
Remember, you can always get a snapshot of Johnson Controls International'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. Johnson Controls International has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was US$0.5 in 2011, compared to US$1.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.6% a year over that time. The dividends haven't grown at precisely 7.6% every year, but this is a useful way to average out the historical rate of growth.
It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Johnson Controls International might have put its house in order since then, but we remain cautious.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Johnson Controls International's earnings per share have shrunk at 11% 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 Johnson Controls International's earnings per share, which support the dividend, have been anything but stable.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that Johnson Controls International paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, Johnson Controls International has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 4 warning signs for Johnson Controls International that investors should know about before committing capital to this stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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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