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Will BorgWarner Raise Its Dividend in 2016?

By Rich Smith - Jan 30, 2016 at 6:13AM

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The future's uncertain, and a hike in BorgWarner's dividend is... nowhere near.

Automotive powertrain specialist BorgWarner (BWA -0.96%) has a checkered past when it comes to the payment of dividends to shareholders. Will the situation improve this year? Will BorgWarner raise its dividend in 2016?

I'm actually not so sure it will.

BWA Chart

BorgWarner's shares have gone nowhere but down lately. But what about its dividend? BWA data by YCharts.

The arguments for a dividend raise
On one hand, there are plenty of reasons BorgWarner might raise its dividend in 2016 -- just to keep up with the Joneses. According to data from Yahoo! Finance, two of BorgWarner's key competitors in the automotive business are Honeywell (HON 0.06%) and Magna International (MGA -1.57%). And it only takes a quick look at either company to see that these alternative investments pay their stockholders a whole lot better than BorgWarner does.

Currently, BorgWarner's $0.52 annual dividend works out to a yield of just 1.8%. (A dividend yield is the stock's dividend divided by its stock price.) This dividend yield is one-quarter lower than the 2.4% Honeywell shareholders enjoy, and Magna pays its share owners even more: 2.5%.

Logically, BorgWarner should want to keep its dividend competitive with its competitors' payouts, so as not to send investors away in search of better dividends. And with BorgWarner currently devoting less than 20% of its earnings to dividend payments, the company should have room for improvement. Twenty percent, by the way, is roughly equal to Magna's dividend payout ratio -- but a significantly lower percentage of earnings than the 36% that Honeywell devotes to dividends. 

I'd also point out that the only reason BorgWarner's dividend yield is even in the same zip code as those of its rivals is because its stock has suffered so badly. Over the past 12 months, Honeywell shares are basically flat with where they were a year ago. Magna shares are down 27%. Meanwhile, BorgWarner shares have shed nearly half their value. Because lower share prices mean higher dividend yields (at least, when the gross dividend amount remains constant), that's boosted the dividend yield on BorgWarner stock to historically high levels.

The arguments against
Speaking of history, I mentioned above that BorgWarner has a checkered history when it comes to paying its shareholders dividends. Let me show you what I mean by that:

BWA Dividends Paid (TTM) Chart

BWA Dividends Paid (TTM) data by YCharts.

See that huge, gaping hole between 2009, when BorgWarner paid its shareholders $0.24, and 2013, when it paid $0.25? Sure, from one perspective, that's a penny-a-share increase. But the more important takeaway from this chart is that for nearly four long years, BorgWarner didn't cut a single dividend check. While the company is paying a decent divvy today, it's got a history of cutting dividends when times get tough.

What this means for investors
This brings us right back to the reason BorgWarner's dividend stands at 1.8% today. With its shares down 46% in 52 weeks, times are clearly tough for BorgWarner. Last quarter, a booming automotive market didn't do much for BorgWarner, whose sales slipped 7% as its profits declined 4%.

So, what does this mean for investors? Let me preface this with a clear caveat that I could be 100% wrong. BorgWarner could decide to up its game and raise its dividend to levels more common among its competitors. But even so, my hunch is this: Given the company's past propensity to take its dividends and head for the hills in hard times, I don't think BorgWarner will raise its dividend in 2016.

Rich Smith does not own shares of, nor is he short, any company named above, but he does have a relative who works for BorgWarner. You can find Rich on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 249 out of more than 75,000 rated members.

The Motley Fool recommends BorgWarner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

BorgWarner Inc. Stock Quote
BorgWarner Inc.
BWA
$38.06 (-0.96%) $0.37
Honeywell International Inc. Stock Quote
Honeywell International Inc.
HON
$194.09 (0.06%) $0.12
Magna International Inc. Stock Quote
Magna International Inc.
MGA
$61.44 (-1.57%) $0.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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