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Something To Consider Before Buying Euromoney Institutional Investor PLC (LON:ERM) For The 2.5% Dividend

Simply Wall St

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Today we'll take a closer look at Euromoney Institutional Investor PLC (LON:ERM) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A 2.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Euromoney Institutional Investor has some staying power. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

LSE:ERM Historical Dividend Yield, July 2nd 2019

Payout ratios

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Euromoney Institutional Investor paid out 92% of its profit as dividends. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Euromoney Institutional Investor paid out 90% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Euromoney Institutional Investor's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

We update our data on Euromoney Institutional Investor every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. Euromoney Institutional Investor 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 the past ten-year period, the first annual payment was UK£0.19 in 2009, compared to UK£0.33 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.4% a year over that time.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Euromoney Institutional Investor might have put its house in order since then, but we remain cautious.

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 not great to see that Euromoney Institutional Investor's have fallen at approximately 9.0% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

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. We're a bit uncomfortable with Euromoney Institutional Investor paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and Euromoney Institutional Investor's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Euromoney Institutional Investor looks quite suboptimal from a dividend investment perspective.

Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 6 analysts we track are forecasting for the future.

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 editorial-team@simplywallst.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.