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Why It Might Not Make Sense To Buy Brunswick Corporation (NYSE:BC) For Its Upcoming Dividend

Brunswick Corporation (NYSE:BC) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 24th of February, you won't be eligible to receive this dividend, when it is paid on the 13th of March.

Brunswick's next dividend payment will be US$0.24 per share. Last year, in total, the company distributed US$0.96 to shareholders. Based on the last year's worth of payments, Brunswick stock has a trailing yield of around 1.5% on the current share price of $64.91. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Brunswick

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. An unusually high payout ratio of 244% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Brunswick generated enough free cash flow to afford its dividend. Fortunately, it paid out only 36% of its free cash flow in the past year.

It's good to see that while Brunswick's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

NYSE:BC Historical Dividend Yield, February 19th 2020
NYSE:BC Historical Dividend Yield, February 19th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Brunswick's earnings per share have dropped 30% a year over the past 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. Brunswick has delivered an average of 34% per year annual increase in its dividend, based on the past ten years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Brunswick is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Has Brunswick got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 244% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Brunswick's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Brunswick has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Wondering what the future holds for Brunswick? See what the 15 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.