Fundamental view – payout‑ratio sustainability
Lear Corp’s $0.77 quarterly payout translates to roughly $3.08 annualized per share. Over the past 12 months the company generated $1.1 billion in net income and $1.4 billion of free cash flow (FCF). Using the most recent quarterly results (net income ≈ $280 M, FCF ≈ $340 M) the implied payout ratio is:
- Net‑income based: $3.08 ÷ $2.80 ≈ 110 % → clearly unsustainable if measured against earnings alone.
- FCF based: $3.08 ÷ $3.40 ≈ 90 % → high but still within the range that a cash‑rich, low‑‑capex business can sustain for a limited period.
Lear’s historical payout has hovered around 55 % of earnings and 70 % of FCF, so the current 90 % of FCF is a step‑up but not unprecedented. The company’s balance sheet remains solid (cash ≈ $1.2 B, debt ≈ $1.0 B) and operating cash‑flow has been growing YoY (+8 %). As long as the free‑cash‑flow margin stays above ~3 % of revenue, the dividend can be funded without eroding liquidity. However, any slowdown in vehicle‑production volumes or a rise in capital‑expenditure cycles could push the payout ratio back toward historical levels.
Technical & trading implications
The stock is trading near its 200‑day moving average (~$115) with a modest upside bias; the $0.77 dividend adds a ~2.5 % yield at current levels. If earnings and FCF hold steady, the dividend will act as a floor, supporting the price and encouraging a “buy‑the‑dip” approach on pull‑backs to the $110‑$112 support zone. Conversely, a miss on next‑quarter earnings or a dip in FCF could trigger a sell‑off, testing the $105 support and potentially prompting a dividend‑cut risk premium.
Actionable take‑away – With a payout ratio still under 100 % of free cash flow and a healthy balance sheet, the dividend appears sustainable in the short‑term, but the high earnings‑based ratio warrants caution. Consider a long‑position with a modest stop around $108 to capture dividend‑yield upside, while staying ready to trim if cash‑flow momentum weakens or earnings miss materializes.