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Regal Rexnord Corporation (NYSE:RRX) will increase its dividend on the 14th of July to US$0.35. This makes the dividend yield 6.5%, which is above the industry average.
View our latest analysis for Regal Rexnord
Regal Rexnord Doesn't Earn Enough To Cover Its Payments
If the payments aren't sustainable, a high yield for a few years won't matter that much. However, prior to this announcement, Regal Rexnord's dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.
Over the next year, EPS is forecast to expand by 63.1%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 136%, which probably can't continue putting some pressure on the balance sheet.
Regal Rexnord Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2012, the dividend has gone from US$0.72 to US$1.40. This implies that the company grew its distributions at a yearly rate of about 6.9% over that duration. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.
Dividend Growth May Be Hard To Achieve
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, things aren't all that rosy. In the last five years, Regal Rexnord's earnings per share has shrunk at approximately 3.1% per annum. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
We'd also point out that Regal Rexnord has issued stock equal to 65% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Our Thoughts On Regal Rexnord's Dividend
Overall, it's great to see the dividend being raised and that it is still in a sustainable range. With shrinking earnings, the company may see some issues maintaining the dividend even though they look pretty sustainable for now. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 2 warning signs for Regal Rexnord you should be aware of, and 1 of them is significant. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.