Today we'll take a closer look at Schweiter Technologies AG (VTX:SWTQ) 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. 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 Schweiter Technologies yielding 3.2% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Schweiter Technologies for its dividend, and we'll go through these below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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. Schweiter Technologies paid out 93% of its profit as dividends, over the trailing twelve month period. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Schweiter Technologies paid out 123% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Schweiter Technologies's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
While the above analysis focuses on dividends relative to a company's earnings, we do note Schweiter Technologies's strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Schweiter Technologies every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Schweiter Technologies has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was CHF9.00 in 2010, compared to CHF40.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% 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 Schweiter Technologies has done it, which we really like.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It's good to see Schweiter Technologies has been growing its earnings per share at 15% a year over the past five years. Although earnings per share are up nicely Schweiter Technologies is paying out 93% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
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. We're a bit uncomfortable with Schweiter Technologies paying out a high percentage of both its cashflow and earnings. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Schweiter Technologies out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 5 Schweiter Technologies analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
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