Dividend paying stocks like Barings BDC, Inc. (NYSE:BBDC) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A high yield and a long history of paying dividends is an appealing combination for Barings BDC. It would not be a surprise to discover that many investors buy it for the dividends. During the year, the company also conducted a buyback equivalent to around 2.0% of its market capitalisation. Some simple analysis can reduce the risk of holding Barings BDC for its dividend, and we'll focus on the most important aspects below.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Barings BDC pays a dividend, it was loss-making during the past year. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.
We update our data on Barings BDC every 24 hours, so you can always get our latest analysis of its financial health, here.
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. For the purpose of this article, we only scrutinise the last decade of Barings BDC's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was US$1.6 in 2011, compared to US$0.6 last year. The dividend has shrunk at around 9.0% a year during that period. Barings BDC's dividend has been cut sharply at least once, so it hasn't fallen by 9.0% every year, but this is a decent approximation of the long term change.
We struggle to make a case for buying Barings BDC for its dividend, given that payments have shrunk over the past 10 years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Barings BDC's earnings per share have shrunk at 50% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
To summarise, shareholders should always check that Barings BDC's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Barings BDC is paying out a dividend despite reporting a loss; clearly a concern. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In short, we're not keen on Barings BDC from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, Barings BDC has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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