BorgWarner’s (BWA) high beta & inconsistent dividend history overshadows 8% dividend increase

BorgWarner’s (NYSE:BWA) dividend was increased by 8%. Its overall yield is slightly below that of the S&P 500 Index, at 1.64%. The firm has paid a dividend since August of 2013,  after the firm announced a suspension of the company’s quarterly dividend of $0.12 per share in May of 2009. The suspension of the dividend was do to poor global economic conditions.

BorgWarner is an auto-parts supplier.  It maintain two divisions, an engine group that produces emissions system components, timing chains, and turbochargers. This segment of BorgWarner accounts for over two-thirds of sales.  The smaller portion of the company’s business is the production of transmission, clutches, and drive systems. Products are sold to original equipment manufacturers. Large customers include Ford, Volkswagen, and Daimler Benz.

BorgWarner currently ranks 5th in yield within the large cap consumer goods, auto parts category. Borgwarner has maintained a solid three-year growth rate of dividends of 36 percent.

The quarterly dividend for the December payment will be $0.14 versus the prior year rate of $0.13 per share. BorgWarner Inc. is not a member of our Top 100 Dividend Stock List (see below).

The dividend will be paid at the new higher rate on December 15, 2016, to shareholders of record at close of business on December 1, 2016. BorgWarner is currently priced at $34.22. Listed in the table below are the quarterly dividend payments since 2013.

Date Quarterly Dividend
12/1/2016 0.14
8/30/2016 0.13
5/27/2016 0.13
2/26/2016 0.13
11/27/2015 0.13
8/28/2015 0.13
5/28/2015 0.13
2/26/2015 0.13
11/26/2014 0.13
8/28/2014 0.13
4/30/2014 0.125
1/30/2014 0.125
10/30/2013 0.125
8/1/2013 0.125

Analysis of BorgWarner Inc. is based upon our five key criteria, which include; 

Category Value Score
Dividend Yield 1.64%  325
Dividend Growth (3 year avg) 4%  35
Forward P/E 9.61  20
S&P Financial Rating BBB+  160
Beta 1.40  225
Total Score    765

Additional Information on P/S ratio and historical yield;

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
1.64% 4% N/A 43.8 0.80 0.43 1.46 0.25% 1.83%

Final Analysis;   

Positives;

  • BorgWarner maintains a 3 year dividend growth rate of 36%.
  • BorgWarner maintains a credit rating of BBB+. This is investment grade.
  • BorgWarner’s forward P/E ratio is just over 9, below that of the market.
  • BorgWarner  is trading below its ten-year average price/sales (P/S) range.
  • BorgWarner’s current dividend yield (1.64%) is above its five-year average historical dividend yield of 1.04%.

Negatives;

  • BorgWarner’s dividend yield is below that of the S&P 500 Index.
  • BorgWarner has paid out a dividend consecutively for the only 3 years after the suspension of the dividend in 2009.
  • BorgWarner maintains a beta of 1.40, much higher than the average company.

Latest Earnings & Overall Analysis:

The company also reported earnings in late October of 78 cents per share for Q3. The was a penny above consensus estimates. This was above the 73 cents per share that BorgWarner reported in the same Q3 period last year. Revenue growth was strong, rising by 17% to $2.21 billion. This was also just above average analyst estimates and 6% above last year’s levels. The engine segment had modest revenue growth of 4% while sales within the drivetrain group escalated strongly.  Drivetrain sales rose 48% to $866 million, largely as a result of the Remy acquisition (see below). Excluding the impact of Remy, sales were up a more modest 11.4%  versus last year.

In 3Q, BWA also repurchased $66mm of common shares, which was about in line with our forecasts Despite the lower investment grade credit rating of BBB+, the company retained $518 million in cash as of the end of Q3.  As for the outlook for Q4, revenue is projected to rise by approximately 16%, primarily due to continued drivetrain group sales. Earnings per share guidance was set at a range of 82 to 86 cents.  The Remy International acquisition is expected to have a positive impact of 2 cents per share.

BorgWarner acquired Remy in the fall of 2015.  Prior to the purchase, Remy was a  leading producer of rotating electrical components with a strong international presence. The company had generated sales of just over a billion in 2014. The acquisition of Remy helps BorgWarner compete in the movement towards cleaner, more fuel-efficient vehicles. It acquired competitive technologies that give BWA more capabilities and the opportunity to enhance several of their product lines including motors, starters, and alternators.

BorgWarner’s expertise in producing Turbochargers and complementary products should assist the firm in generating double-digit sales growth out to 2022.   The firm has made a strong effort to improve efficiency for internal combustion engines.  This allows the firm to better compete with not only other powertrain companies, but also hybrid and electric technologies.   Improving fuel efficiency is the key element to keeping BorgWarner competitive.  Overall BWA is a solid global industrial company with double-digit growth potential in revenue and single-digit dividend growth. However, the firm has a modest dividend and growth rate, high beta, and history of suspending the dividend during difficult economic times. Based upon these factors, BorgWarner Inc does not qualify as a member of our  Top 100 Dividend Stocks

BorgWarner Inc. Dividend Yield Chart (Click to enlarge)

bwa

Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

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