Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll take a closer look at Eisen- und Hüttenwerke AG (FRA:EIS) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
A high yield and a long history of paying dividends is an appealing combination for Eisen- und Hüttenwerke. We'd guess that plenty of investors have purchased it for the income. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 131% of Eisen- und Hüttenwerke's profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Eisen- und Hüttenwerke paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable. It's good to see that while Eisen- und Hüttenwerke's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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. Eisen- und Hüttenwerke 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 cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was €2.00 in 2009, compared to €0.75 last year. The dividend has shrunk at around 9.3% a year during that period. Eisen- und Hüttenwerke's dividend has been cut sharply at least once, so it hasn't fallen by 9.3% every year, but this is a decent approximation of the long term change.
We struggle to make a case for buying Eisen- und Hüttenwerke for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Over the past five years, it looks as though Eisen- und Hüttenwerke's EPS have declined at around 15% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
To summarise, shareholders should always check that Eisen- und Hüttenwerke's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Eisen- und Hüttenwerke paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with Eisen- und Hüttenwerke from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Eisen- und Hüttenwerke stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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 email@example.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.