Last update on 2024-06-27

TransDigm Group (TDG) - Dividend Analysis (Final Score: 2/8)

Comprehensive analysis of TransDigm Group (TDG) dividend policy using an 8-criteria scoring system. Offers insights into performance and stability for income-focused investors.

Short Analysis - Dividend Score: 2

We're running TransDigm Group (TDG) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The analysis of TransDigm Group's (TDG) dividend policy is based on eight key criteria. Here’s what we found: 1. **Dividend Yield**: TransDigm Group's current dividend yield of 3.4599% is higher than the industry average of 1.16%, which is attractive to income-seeking investors. However, its past dividend yields have been inconsistent. 2. **Dividend Growth Rate**: Over the last 20 years, TDG had an average annual growth rate of -11.1572%, failing to exceed the 5% mark. This negative growth rate and inconsistency signal an unstable dividend policy. 3. **Payout Ratio**: With an average payout ratio of 115.38% over the last 20 years, TDG exceeds the optimal 65%, indicating potential financial risks and inconsistency. 4. **Coverage by Earnings**: TDG shows inconsistency in its dividends being well-covered by earnings, highlighting financial unpredictability. 5. **Coverage by Free Cash Flow**: While TDG has shown robust coverage in some years, inconsistent free cash flow coverage raises concerns about dividend sustainability. 6. **Stable Dividends**: TDG has shown significant variability in its dividends since 2009, with years of no dividend payments, indicating unstable growth. 7. **25 Years of Dividends**: TDG does not meet this criterion as it has provided dividends inconsistently over the past 23 years. 8. **Stock Repurchases**: Over the past 20 years, TDG has had strategic but irregular stock repurchase activities, reflecting sporadic attempts to enhance shareholder value.

Insights for Value Investors Seeking Stable Income

While TransDigm Group (TDG) does show an attractive current dividend yield, the overall analysis reveals significant instability and inconsistency in its dividend policy. The average dividend growth rate is negative, the payout ratio is alarmingly high, and both earnings and cash flow coverage are inconsistent. These factors could present financial risks to an investor seeking stable income. Additionally, the company has not been able to consistently pay dividends over an extended period and has had irregular stock repurchase activities. Thus, potential investors should be cautious and consider these risks before investing in TransDigm Group (TDG) for its dividend potential.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is a financial ratio that indicates how much a company pays out in dividends each year relative to its stock price. A higher dividend yield is often attractive to investors seeking income.

TransDigm Group's current dividend yield of 3.4599% surpasses the industry average of 1.16%. This significantly higher yield stands out particularly because it was achieved despite a tumultuous history of dividend distributions. Notably, during years like 2009, 2013, 2014, 2017, and 2019, the dividend yields spiked drastically, reaching as high as 16.1087% in 2009, in contrast to modest industry averages. Additionally, while many of the previous years witnessed no dividends, the dividends that did occur were typically high, demonstrating an inconsistency in their approach up until recent years. Furthermore, with the 2023 closing stock price at $1011.60, the plunge in yield isn't as alarming given this bullish stock performance. The overall trend shows a shift from erratic to a more stable dividend strategy, aligning more effectively with investor expectations. The decision to stabilize yields around a higher-than-average threshold is reassuring for income-driven investors.

Average annual Growth Rate higher than 5% in the last 20 years?

Dividend Growth Rate measures the annualized percentage rate of growth of a company's dividend payments over a specific period, typically several years or decades. A consistent rate of growth is often seen as a positive sign, indicating that the company is generating enough profit not only to maintain its dividend payments but to increase them over time. For a long-term investor, a dividend growth rate above 5% can be an important factor in gauging the potential for future income expansion and overall company financial health.

TransDigm Group (TDG) has shown extreme variability in its dividend payout over the last 20 years, with numerous instances of 0% or negative values, particularly noteworthy in years like 2013, 2015, 2017, 2018, and 2020. The only standout positive values are in years such as 2013 at 71.2062%, 2023 at 89.1892%, and 2014 at 13.6364%. The average dividend growth rate over this period is -11.1572%, suggesting that not only has the company struggled to consistently grow its dividend payout, it appears to follow a pattern of sharp increases followed by periods of zero or negative growth. This erratic dividend growth rate does not meet the criterion of exceeding 5% growth over 20 years, and signals a lack of stable dividend policy, which is a red flag for income-focused investors.

Average annual Payout Ratio lower than 65% in the last 20 years?

Explaining the historical average payout ratio of a company as a measure of financial stability.

Analyzing the payout ratio data for TransDigm Group (TDG), it's evident that their payout ratio exceeds the optimal threshold of 65% in several years. The average payout ratio for the given period is 115.38%. This trend indicates potential financial risk as it suggests that the company might be returning a significant portion of its earnings to shareholders, compromising its ability to reinvest in growth or to hold a cushion against economic downturns. It is crucial to assess TDG's ability to sustainably manage its dividend payouts and ensure long-term financial health.

Dividends Well Covered by Earnings?

Earnings per share (EPS) should sufficiently cover the dividend per share for a company to be considered financially healthy. A well-covered dividend is a signal of stability.

When evaluating TransDigm Group (TDG), it's essential to see that their Earnings per Share (EPS) can sustain their dividend payouts. Looking at the data from 2003 to 2023, there are several observations:\n\n- EPS spiked significantly from 2009 onwards, reaching a high of $22.6923 in 2023.\n- Dividends were introduced in 2009, with sporadic distributions and some years without dividends.\n- Notably, there were substantial dividend payouts in 2013 ($22 per share), 2014 ($25 per share), 2019 ($62.5 per share), 2022 ($18.5 per share), and 2023 ($35 per share).\n\nDividends as covered by earnings per share varies greatly across different years, with several years when dividends are absent. Significant payouts (2013, 2014, 2019, 2022, and 2023) do show replication through substantial earnings when dividends are issued. For instance, high dividends per share in 2013 are covered by a 4.0 ratio, reflecting earnings stability. Yet, there are multiple years reflecting a 0 ratio, wherein dividends are issued without adequate coverage due to non-payment in several instances.\n\nIn conclusion, while TransDigm has demonstrated years of strong dividend coverage, their sporadic nature in dividend issuances could be a topic of concern. Predictability for the investor is positive when dividends are backed by strong earnings, marking uncertain trends seen herein as being circumstantially caused by the firm's recovery potential and strategic restructuring. Sustained annual dividends along with proportionate earnings performances will enhance their comprehensive standing in the EPS to dividend ratio coverage.

Dividends Well Covered by Cash Flow?

Dividends Well Covered by Cash Flow indicates whether a company's free cash flow is sufficient to cover its dividend payouts. This is crucial for assessing dividend sustainability.

Observing the data for TransDigm Group (TDG), the dividend coverage by free cash flow trends are inconsistent. In some years, particularly 2011 (2.195), 2013 (4.581) and 2017 (3.597), the coverage ratio shows that the free cash flow could comfortably cover dividend payouts, signaling robustness. However, in several other years, the ratio is substantially low or close to zero, notably in recent years 2022 (1.316) and 2023 (0.031), suggesting potential strain. Such fluctuations might raise investment concerns regarding the consistency and reliability of dividend sustainability.

Stable Dividends Since the Company Began Paying Dividends?

Evaluating the stability of dividends over a 20-year period is crucial for income-seeking investors, as they rely on steady or gradually increasing income from their investments. A drop of more than 20% in dividend per share would be a red flag and could signal potential underlying financial problems with the company.

Over the past 20 years, TransDigm Group's dividend payments have shown considerable variability. Starting from 2009, the dividends per share were $7.65, then it dropped back to $0 the next few years, spiked to $12.85 in 2012, and peaked at $62.5 in 2019. Every other year without dividends or significantly lower dividends signals instability rather than gradual growth or even consistency. Especially notable are the years with no dividends after significant payouts. This pattern doesn't indicate the reliability income-seeking investors typically look for. Particularly, the dividend of $62.5 in 2019 dropping to nothing in 2020 and staying at $0 until spiking again to $18.5 and later to $35 showcases extreme volatility. Despite occasional high returns, the inconsistency heavily weighs in as a detrimental trend for this criterion.

Dividends Paid for Over 25 Years?

Examining whether a company has paid dividends consistently over a prolonged period (such as 25 years) provides insight into its financial stability and shareholder commitment.

TransDigm Group (TDG) does not meet the criterion of having paid dividends for over 25 years. From 2000 to 2023, TDG's dividend payment history has been highly inconsistent. Noteworthy are significant dividend payments in certain years, such as 62.5 in 2019 and 35 in 2023. However, there are many years within this period where no dividends were paid at all. This inconsistency can create uncertainty for investors who prioritize steady income and may suggest that the company either reallocates capital for other uses or faces economic variability. Despite the occasional high payouts, the lack of a consistent dividend policy over 25 years does not bode well for dividend-focused investors.

Reliable Stock Repurchases Over the Past 20 Years?

Assessing reliable stock repurchases over two decades helps in determining a company's commitment to returning value to shareholders through buybacks.

TransDigm Group's pattern of repurchasing shares over the past 20 years reveals noteworthy fluctuations. Out of 21 years, there are six years (2004, 2015, 2016, 2017, 2022, 2023) where significant repurchases were observed. The trend shows that in these years, TransDigm took strategic steps to buy back shares from the market, potentially as a move to enhance shareholder value and confidence. For instance, after 2014, the company repurchased shares in three consecutive years, reducing their share count from 57,066,000 in 2014 to 55,530,000 in 2017, reflecting a steady commitment to reigning in supply. More recently, repurchases in 2022 and 2023 can be seen as a response to post-pandemic market stabilization. Overall, this reveals a somewhat inconsistent but strategic pattern in share repurchases, likely driven by market conditions and internal financial strategies. The average repurchase rate of 496.3945 indicates that, while there has been active buyback activity, it has not been constant, which might be a prudent approach depending on available capital and market valuation.