Knorr-Bremse's Dividend: A Balancing Act Between Earnings Volatility and Payout Stability

For income-focused investors, Knorr-Bremse AG (DE:KBGM) has long been a familiar name. The German industrial giant, a leader in braking systems for commercial vehicles and rail transport, has maintained a consistent dividend policy despite a five-year stretch of earnings volatility. However, with a recent uptick in operational performance and a 7% dividend increase in 2025, the question remains: Is Knorr-Bremse's payout still a safe bet for those seeking stable income in an uncertain economic climate?

The Earnings Conundrum: A Mixed Bag of Performance

Over the past five years, Knorr-Bremse's earnings per share (EPS) have declined by an average of 5.4% annually, lagging behind the 14.3% growth rate of the broader Machinery industry. This decline, compounded by quarterly fluctuations (e.g., a -6.2% industry-wide drop in 2023), paints a picture of uneven progress. Yet 2024 marked a turning point: The company reported a 21% surge in EPS, outpacing its five-year average and reversing a negative industry trend.

The recent acceleration in earnings is driven by improved operational efficiency and a strong performance in its Rail Vehicle Systems division. For example, Q1 2025 EPS reached €0.95, up from €0.77 in Q1 2024, while full-year 2024 EPS hit €3.43—a 13% increase from 2023. These improvements, coupled with a 20.7% return on equity (ROE) and 7.4% net profit margin (up from 6.3% in 2023), suggest that Knorr-Bremse is regaining its footing.

Dividend Payout: A Policy of Prudence Amid Uncertainty

Knorr-Bremse's dividend history reflects a cautious approach. Between 2020 and 2024, the dividend per share fluctuated between €1.45 and €1.85, with a 21.6% drop in 2023 followed by a 7% increase in 2025. The 2024 payout of €1.75 per share corresponds to a 60% payout ratio—a temporary spike attributed to non-recurring non-cash charges. Excluding these, the payout aligns with the company's long-term target of 40–50% of net income.

Crucially, the dividend is well-supported by cash flow. The cash payout ratio stands at 33.9%, meaning the company generates more than enough liquidity to sustain the payout. A dividend cover of 2.0 further reinforces this, indicating earnings are double the required amount to cover the dividend. This is a critical safeguard for income investors, as it ensures the payout remains resilient even if earnings dip.

However, the five-year EPS decline raises concerns. While the 2024 rebound is encouraging, sustaining this growth will depend on macroeconomic conditions and the company's ability to navigate industry headwinds. For instance, the Commercial Vehicle Systems division faced challenges in early 2025, highlighting vulnerabilities in cyclical markets.

Risk vs. Reward: Is the Dividend Sustainable?

For income-focused investors, the key lies in balancing Knorr-Bremse's recent performance with its historical trends. On one hand, the company's strong cash flow, high dividend cover, and 2.1% yield (at €84.00 share price) make it an attractive option. On the other, the five-year EPS contraction and industry-wide competition (e.g., Tesla's foray into electric vehicle systems) introduce risks.

The company's 2025 guidance—targeting €8.1–8.4 billion in revenue and a 12.5–13.5% EBIT margin—suggests confidence in maintaining profitability. A free cash flow of €700–800 million further supports dividend sustainability. Yet investors should monitor the impact of global supply chain disruptions and interest rate volatility, which could pressure margins.

Strategic Recommendations

1. Diversify Exposure: Given the industrial sector's cyclicality, pair Knorr-Bremse with defensive stocks or bonds to mitigate risk.
2. Monitor Earnings Guidance: The July 31, 2025, earnings report will be a key test of whether the 2024 rebound is a trend or a temporary rebound.
3. Reassess Valuation Metrics: The stock's trailing P/E of 34.34 is high, but the forward P/E of 20.33 reflects optimism about future earnings. Investors should compare this to peers like Wabco (WBC) or ZF Friedrichshafen (DE:ZF).
4. Consider Long-Term Policy: Knorr-Bremse's commitment to a 40–50% payout ratio (excluding non-recurring items) provides a buffer, but sustained EPS growth is essential for dividend expansion.

Conclusion

Knorr-Bremse's dividend remains a viable option for income-focused investors, supported by robust cash flow and a prudent payout policy. However, the five-year earnings decline and industry headwinds warrant caution. For those willing to accept moderate risk in exchange for a 2.1% yield and potential upside from operational improvements, the stock offers a compelling case. Yet, in a landscape where stability is paramount, diversification and close monitoring of earnings trends will be key to navigating this balancing act.