I've had my eye on Dana (NYSE:DCN) and its dividend for about a year now. I felt the dividend wasn't on solid ground, but I held out hope that the company's restructuring efforts would boost the company's free cash flow and, in turn, its ability to fund its dividend.
It looks like my hope couldn't have been more misplaced. Life has been difficult for Delphi (NYSE:DPH) and Dana the last few years because of the reliance General Motors (NYSE:GM), Ford (NYSE:F), and DaimlerChrysler (NYSE:DCX) have on trucks and SUVs that require copious amounts of fuel. As fuel prices have risen, sales of these vehicles have slowed. Couple changes in consumer behavior with rising costs for steel and other inputs, and you have some very real economic problems.
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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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
