Dividend paying stocks like Carlo Gavazzi Holding AG (VTX:GAV) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. 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.
A high yield and a long history of paying dividends is an appealing combination for Carlo Gavazzi Holding. 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.
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. Carlo Gavazzi Holding paid out 91% of its profit as dividends, over the trailing twelve month period. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Carlo Gavazzi Holding paid out 106% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. As Carlo Gavazzi Holding's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
With a strong net cash balance, Carlo Gavazzi Holding investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Carlo Gavazzi Holding's latest financial position, by checking our visualisation of its financial health.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Carlo Gavazzi Holding has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was CHF5.00 in 2010, compared to CHF12.00 last year. Dividends per share have grown at approximately 9.1% per year over this time.
Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination.
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. In the last five years, Carlo Gavazzi Holding's earnings per share have shrunk at approximately 3.4% per annum. 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.
To summarise, shareholders should always check that Carlo Gavazzi Holding's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Carlo Gavazzi Holding paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. In this analysis, Carlo Gavazzi Holding doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.
Market movements attest to how highly valued a consistent dividend policy is to one to which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Carlo Gavazzi Holding has 3 warning signs (and 2 which are significant) we think you should know about.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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