I've had my eye on Dana
It looks like my hope couldn't have been more misplaced. Life has been difficult for Delphi
The company's announcement last week that it would miss earnings has triggered the latest round of worrying and pessimism, but the warning signs have been in the company's financial statements for the last couple of years.
The primary problem has been a decrease in operating cash flow (found on the cash flow statement). We talk a lot about the importance of free cash flow around here. And if operating cash flow is shrinking as it is at Dana, it's near impossible to grow free cash flow. As you might expect, Dana has suffered from declining free cash flow, as well, and has been operating cash flow and free cash flow negative for the last 12 months.
With operating cash flow and free cash flow in decline, what did Dana do? Raise the dividend, naturally! To Dana's credit, it was also divesting portions of its business, but this cash was all plowed into paying down debt and capital expenditures to expand other parts of the business, which still leaves the dividend underfunded.
At the moment, Dana sports the kind of financials that we recommend dividend-seeking subscribers of our Income Investor service to avoid. So as you gaze at the current 5% dividend from Dana and wonder whether it's worth the risk, I say take a pass, because it's likely that this dividend will be cut. With the cost of financing its debt likely to rise and its business in a state of change, the company is better off putting its cash into the healthy parts of its business, financing its debt, and getting the business stable.
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