Is Deutsche Grundstücksauktionen AG (ETR:DGR) A Smart Pick For Income Investors?
Is Deutsche Grundstücksauktionen AG (ETR:DGR) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
In this case, Deutsche Grundstücksauktionen likely looks attractive to investors, given its 9.3% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
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Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 105% of Deutsche Grundstücksauktionen's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
While the above analysis focuses on dividends relative to a company's earnings, we do note Deutsche Grundstücksauktionen's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of Deutsche Grundstücksauktionen's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Deutsche Grundstücksauktionen's dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was €0.10 in 2010, compared to €1.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time. Deutsche Grundstücksauktionen's dividend payments have fluctuated, so it hasn't grown 26% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Deutsche Grundstücksauktionen has grown its earnings per share at 21% per annum over the past five years. Earnings per share have been growing very rapidly, although the company is also paying out virtually all of its profit in dividends. While EPS could grow fast enough to make the dividend sustainable, in this type of situation, we'd want to pay extra attention to any fragilities in the company's balance sheet.
Conclusion
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with its high payout ratio. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, we're unenthused by Deutsche Grundstücksauktionen as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 4 warning signs for Deutsche Grundstücksauktionen that you should be aware of before investing.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
