Dividend investors generally like to see the stocks they own hike their disbursements annually. It's why the Dividend Aristocrat list (companies that have hiked dividends for 25 or more years) garners such attention. Investors don't like to see these dividend streaks ending -- and right now Briggs & Stratton Corporation (BGGS.Q) and Flowserve Corporation (FLS -0.54%) both look like they are about to let investors down in 2018.
What's behind a growing dividend?
When you look at a dividend-paying company you need to think beyond the yield. That's just a simple metric that tells what you're getting, and doesn't give you any clue about the sustainability of a dividend. And making sure those checks keep coming, and hopefully growing in line with or faster than inflation, is a key step in the dividend stock selection process.
A quick way to cut down the list of dividend payers is to focus on those companies that have long histories of regular annual dividend hikes. Briggs' streak is at nine years and Flowserve's is at 11, enough in both cases to suggest a commitment to returning value to shareholders via consistent dividend increases.
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The only problem is that 2018 hasn't seen an increase from either company yet. And unless they make bold ninth-inning moves, their streaks are headed for the dustbin this year.
The really worrisome part of this story, however, is that the end of a dividend streak is often the first sign that a dividend cut could be in the cards. In fact, neither company has increased its quarterly dividend since 2016, though the timing of declaration dates and payment dates allowed their annual streaks to extend into 2017. When you look at each company's financials you can clearly see why dividend investors should be paying extra attention to Briggs and Flowserve today.
A difficult set of figures
Revenue at both Briggs & Stratton and Flowserve were lower in their most recent fiscal years then they were a decade earlier. In fact, the two companies have basically been treading water on the top line for a little while now. Gasoline engine and power equipment maker Briggs & Stratton has been facing difficult market conditions in the residential lawn mower market, where a large number of its engines end up going. And fluid motion and control products maker Flowserve suffered through a long downturn in the industrial markets it serves.
The end result in both cases, however, was the same: a top line that wasn't going anywhere. If you can't grow sales, it's hard to grow your bottom line. Both companies' earnings have bounced around a fair amount over the past decade, with notable share repurchases providing support to per-share figures. However, the bigger concern is that both companies' earnings in the last fiscal year were lower than earnings per share a decade earlier. Meanwhile, the dividends at each company were heading steadily higher. Briggs has seen its payment rise by nearly 30% since 2006, and Flowserve has more than doubled its dividend payment over the past 10 years.
FLS Total Dividends Paid (TTM) data by YCharts
To make matters worse, the last year or so has been particularly difficult for both companies. Flowserve has seen lower year-over-year earnings in four of the last six quarter. Briggs has matched that record, but has also bled red ink in three of the last four quarters. Looking at trailing-12-month numbers, neither company is covering its dividend with earnings today.
To be fair, dividends don't come out of earnings; they come out of cash flow. And there's a lot a company can do to support dividends through tough periods, including taking on additional debt. But with long-term debt at roughly 50% of Flowserve's capital structure, that's not a great idea for the cyclical company. Briggs has a little more flexibility, with long-term debt at around 25% of its capital structure, but its free cash flow is negative over the trailing 12 months, and was pretty weak in fiscal 2017 and 2018 as well. Leveraging up to raise the dividend under those conditions wouldn't be the best use of its balance sheet, particularly if it meant boosting the dividend to an unsustainable level over the long term.
Which, at the end of the day, is really why both companies have held the line on dividends for more than a year. They don't want to increase their dividends if they really can't afford to keep paying higher levels.
Dividend investors should be wary
While that's clearly the right move for Briggs & Stratton and Flowserve, the investor takeaway is pretty clear. Each company is facing notable headwinds that they are having difficulty navigating, and the dividend decisions they are making highlight this fact. For dividend investors that's a sign that it's time to pay very close attention to these companies, because the next shoe to drop could be a dividend cut if conditions continue to get worse.
