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Does It Make Sense To Buy Ascom Holding AG (VTX:ASCN) For Its Yield?

Simply Wall St

Dividend paying stocks like Ascom Holding AG (VTX:ASCN) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Ascom Holding is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story . Some simple research can reduce the risk of buying Ascom Holding for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

SWX:ASCN Historical Dividend Yield, November 17th 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. 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 72% of Ascom Holding's profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while Ascom Holding pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

We update our data on Ascom Holding every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the last decade of data, we can see that Ascom Holding paid its first dividend at least nine years ago. It's good to see that Ascom Holding has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was CHF0.25 in 2010, compared to CHF0.45 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.7% a year over that time. The dividends haven't grown at precisely 6.7% every year, but this is a useful way to average out the historical rate of growth.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Ascom Holding might have put its house in order since then, but we remain cautious.

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. Ascom Holding's earnings per share have shrunk at 10% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Ascom Holding's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Ascom Holding gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. Earnings per share are down, and Ascom Holding's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Ascom Holding from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 5 analysts we track are forecasting for the future.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.