Is Entersoft S.A. (ATH:ENTER) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.
Entersoft has only been paying a dividend for a year or so, so investors might be curious about its 3.6% yield. That said, the recent jump in the share price will make Entersoft's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 54% of Entersoft's profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 61% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Entersoft has available to meet other needs. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Remember, you can always get a snapshot of Entersoft'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. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. During the past one-year period, the first annual payment was €0.13 in 2018, compared to €0.18 last year. Dividends per share have grown at approximately 38% per year over this time.
We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Entersoft has grown its earnings per share at 22% per annum over the past five years. With recent, rapid earnings per share growth and a payout ratio of 54%, this business looks like an interesting prospect if earnings are reinvested effectively.
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. First, we think Entersoft is paying out an acceptable percentage of its cashflow and profit. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. In sum, we find it hard to get excited about Entersoft from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
See if management have their own wealth at stake, by checking insider shareholdings in Entersoft stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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 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. Thank you for reading.