Corning Inc. (GLW +0.20%) recently announced a two-cent increase to its quarterly dividend, bringing it to $0.155 per share, which results in a 2.2% annual yield at the stock's March 9 closing price. With the 15% bump in dividend comes a big question: How safe is the dividend?
Corning is a diversified materials company that utilizes its core technologies of glass science, ceramic science, and optical physics to address markets that include optical communications, mobile consumer products, displays, automotive, and life sciences materials. Growth is expected in all the segments and this sets the company up for dividend success.
Image source: Corning.
Display technologies segment
The largest contributor to Corning overall is the display business, which contributed just over $1 billion in core earnings in 2016. The company expects demand for its glass to increase in the mid-single digits in 2017.
Corning utilizes a proprietary fusion process whereby the glass is formed in air and drawn down to form an incredibly flat piece of glass with very precise thickness controls. The company's products are used in LCD televisions, notebook computers, and flat panel monitors.
Optical communications segment
The primary product in Corning's optical communications segment is optical fiber. Sales in this unit are expected to grow in the low teens year over year in 2017 and it had core earnings of $297 million in 2016.
This segment helps Corning serves the world's ever-growing need for increased high-speed data transmission. The company supplies products that enable fiber to the home, wireless connectivity to the fiber network, solutions for data centers, and optical cables for consumer products.
Specialty materials segment
Corning makes some of the lightest, most versatile glass products that enable laptop screens and mobile phones to exhibit superior performance. This segment of Corning's business contributed $189 million in core earnings to the company in 2016, and is highly dependent upon sales of Gorilla Glass. The company expects to grow sales in the high teens for the first quarter and was unable to give full-year guidance due to the dependence upon the timing of its customers' products.
In addition to consumer products, this business is also a supplier to the aerospace and defense industry.
Environmental technologies segment
Corning supplies products to the automotive industry to help reduce emissions. This product line delivered $136 million in core earnings for 2016 and is expected to see small growth in 2017.
Corning's invention of a ceramic substrate that is now the standard for catalytic converters in vehicles worldwide is the major revenue driver for this business segment.
Life sciences segment
Life Sciences accounted for $77 million in 2016 core earnings. The business is expected to grow in the low single digits year over year. Products include laboratory consumables, general lab ware, and equipment.
Corning's core earnings are a non-GAAP financial measure that factor in changes in currency, pension adjustments, and acquisition-related costs. Total "core" earnings have been increasing and that bodes well for the strength of the dividend.
| Metric | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 |
|---|---|---|---|---|
| Core diluted earnings per common share | $0.28 | $0.37 | $0.42 | $0.50 |
Data source: Corning.
Dividend coverage ratio
The ability of a company to pay its dividend can be shown through its dividend coverage ratio, which compares the company's dividend to its profit. In 2016, Corning earned $3.53 per share in a year that included a one-time non-taxable gain of $2.7 billion associated with a strategic realignment of Dow Corning. The 2016 dividend to shareholders was $0.54 and the coverage ratio was 6.54.
Corning won't have that $2.7 billion gain going forward. If we exclude the one-time events and currency transactions and look at 2016 core earnings from each business segment, we come up with $1.57 contributed by the various business segments. This more repeatable earnings' result yields a coverage ratio of 2.91 for 2016.
If Corning's segments fail to meet management's targets and stay flat in 2017, that would put the dividend coverage ratio at 2.53 for the year and that would put the dividend well within the capability of its business operations to support without having to dip into the company's cash reserves. As a bonus, management has authorized a share buyback plan that, if executed, will decrease the number of shares outstanding and help further support the dividend.
It's heartening for shareholders to see Corning's broad range of businesses and the growth projected for them, which provide the profits that underpin the dividend going forward.
