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Dividend paying stocks like Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) 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 stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A 2.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Schnitzer Steel Industries has some staying power. The company also bought back stock during the year, equivalent to approximately 3.8% of the company's market capitalisation at the time. There are a few simple ways to reduce the risks of buying Schnitzer Steel Industries for its dividend, and we'll go through these below.
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. In the last year, Schnitzer Steel Industries paid out 20% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Of the free cash flow it generated last year, Schnitzer Steel Industries paid out 27% as dividends, suggesting the dividend is affordable. It's positive to see that Schnitzer Steel Industries's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
We update our data on Schnitzer Steel Industries every 24 hours, so you can always get our latest analysis of its financial health, here.
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. For the purpose of this article, we only scrutinise the last decade of Schnitzer Steel Industries's dividend payments. During the past ten-year period, the first annual payment was US$0.068 in 2009, compared to US$0.75 last year. This works out to be a compound annual growth rate (CAGR) of approximately 27% a year over that time.
It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Schnitzer Steel Industries has done it, which we really like.
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. It's good to see Schnitzer Steel Industries has been growing its earnings per share at 69% a year over the past 5 years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings 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. Firstly, we like that Schnitzer Steel Industries has low and conservative payout ratios. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. All these things considered, we think this organisation has a lot going for it from a dividend perspective.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 3 analysts we track are forecasting for Schnitzer Steel Industries for free with public analyst estimates for the company.
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.