Dana Incorporated: High Dividend Yield with Questionable Sustainability

The board of Dana Incorporated has announced that it will pay a dividend of $0.10 per share on August 30. This represents an annual dividend yield of 3.6% of the current stock price, which is above the industry average. While impressive dividend yields may seem attractive, the sustainability of such payments is crucial. Dana is paying out the majority of its free cash flow as dividends despite a lack of profitability. This is rather unusual for a company that is not profitable and could pose long-term issues. A lack of reinvestment could also hamper growth. Earnings per share are forecasted to grow by 194.2% over the next twelve months. If the dividend continues its current trend, the payout ratio could become very high and place pressure on the balance sheet. **Dividend Volatility** A long history of dividends is reassuring as it indicates a certain level of stability. However, the dividend has been cut at least once in the past ten years. In 2014, the annual payment was $0.20, while the most recent payment in the last fiscal year was $0.40, equating to an annual growth rate of 7.2%. Despite the growth, caution is warranted. **Limited Dividend Growth Prospects** Due to historical dividend cuts, it is important to consider earnings growth. Over the past five years, earnings per share have decreased by 48%, which is problematic from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall significantly. Although an increase in earnings is expected next year, caution is advisable until stable growth can be achieved. **Dividend Reliability in Question** Overall, it is encouraging that Dana pays a consistent dividend; however, maintaining this level long-term may not be feasible. The payments are quite high, and performance to date has been mixed. Therefore, income investors might find it more prudent to consider other companies. Companies with stable dividend policies tend to attract more investor interest than those with inconsistent approaches. Nonetheless, investors should consider multiple factors before investing. For example, we have identified two warning signs for Dana that investors should be aware of. If Dana is not the right choice, there are many other attractive dividend stocks available.