Here's Why We're Wary Of Buying ABB Ltd's (VTX:ABBN) For Its Upcoming Dividend

ABB Ltd (VTX:ABBN) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 30th of March to receive the dividend, which will be paid on the 1st of April.

ABB's next dividend payment will be CHF0.80 per share, and in the last 12 months, the company paid a total of CHF0.81 per share. Based on the last year's worth of payments, ABB has a trailing yield of 4.6% on the current stock price of CHF17.31. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for ABB

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. ABB distributed an unsustainably high 176% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 107% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Cash is slightly more important than profit from a dividend perspective, but given ABB's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

SWX:ABBN Historical Dividend Yield March 26th 2020
SWX:ABBN Historical Dividend Yield March 26th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. ABB's earnings per share have fallen at approximately 16% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, ABB has lifted its dividend by approximately 5.1% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. ABB is already paying out 176% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.