Could Harley-Davidson, Inc. (NYSE:HOG) Have The Makings Of Another Dividend Aristocrat?

Could Harley-Davidson, Inc. (NYSE:HOG) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

A high yield and a long history of paying dividends is an appealing combination for Harley-Davidson. We’d guess that plenty of investors have purchased it for the income. The company also bought back stock equivalent to around 7.7% of market capitalisation this year. Remember though, given the recent drop in its share price, Harley-Davidson’s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. There are a few simple ways to reduce the risks of buying Harley-Davidson for its dividend, and we’ll go through these below.

Explore this interactive chart for our latest analysis on Harley-Davidson!

NYSE:HOG Historical Dividend Yield May 5th 2020

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Harley-Davidson paid out 64% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Harley-Davidson’s cash payout ratio in the last year was 36%, which suggests dividends were well covered by cash generated by the business. It’s positive to see that Harley-Davidson’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Is Harley-Davidson’s Balance Sheet Risky?

As Harley-Davidson has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Harley-Davidson has net debt of 8.71 times its EBITDA, which implies meaningful risk if interest rates rise of earnings decline.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. With EBIT of 25.75 times its interest expense, Harley-Davidson’s interest cover is quite strong – more than enough to cover the interest expense. Despite a decent level of interest cover, shareholders should remain cautious about the high level of net debt. Rising rates or tighter debt markets have a nasty habit of making fools of highly-indebted dividend stocks.

Consider getting our latest analysis on Harley-Davidson’s financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Harley-Davidson’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.40 in 2010, compared to US$1.52 last year. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time.

With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It’s not great to see that Harley-Davidson’s have fallen at approximately 9.7% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.

Conclusion

To summarise, shareholders should always check that Harley-Davidson’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Harley-Davidson has an acceptable payout ratio and its dividend is well covered by cashflow. It’s not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. In sum, we find it hard to get excited about Harley-Davidson from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we’ve identified 2 warning signs for Harley-Davidson (1 makes us a bit uncomfortable!) that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you spot an error that warrants correction, please contact the editor at [email protected] 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.

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