It looks like Amsterdam Commodities N.V. (AMS:ACOMO) is about to go ex-dividend in the next 2 days. You can purchase shares before the 5th of May in order to receive the dividend, which the company will pay on the 14th of May.
Amsterdam Commodities's upcoming dividend is €0.70 a share, following on from the last 12 months, when the company distributed a total of €1.10 per share to shareholders. Based on the last year's worth of payments, Amsterdam Commodities has a trailing yield of 5.6% on the current stock price of €19.64. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Amsterdam Commodities can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 85% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether Amsterdam Commodities generated enough free cash flow to afford its dividend. It distributed 48% of its free cash flow as dividends, a comfortable payout level for most companies.
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.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's not encouraging to see that Amsterdam Commodities's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Amsterdam Commodities has increased its dividend at approximately 11% a year on average.
The Bottom Line
From a dividend perspective, should investors buy or avoid Amsterdam Commodities? We're not enthused by the flat earnings per share, although at least the company's payout ratio is within reasonable bounds. Additionally, it paid out a lower percentage of its free cash flow, so at least it generated more cash than it spent on dividends. All things considered, we are not particularly enthused about Amsterdam Commodities from a dividend perspective.
If you're not too concerned about Amsterdam Commodities's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. We've identified 2 warning signs with Amsterdam Commodities (at least 1 which is significant), and understanding these should be part of your investment process.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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