Readers hoping to buy Galenica AG (VTX:GALE) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 22nd of May in order to receive the dividend, which the company will pay on the 26th of May.
Galenica's upcoming dividend is CHF1.80 a share, following on from the last 12 months, when the company distributed a total of CHF1.80 per share to shareholders. Looking at the last 12 months of distributions, Galenica has a trailing yield of approximately 2.6% on its current stock price of CHF69. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Galenica paid out more than half (71%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 43% 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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Galenica earnings per share are up 9.2% per annum over the last five years. Decent historical earnings per share growth suggests Galenica has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Galenica has delivered an average of 4.4% per year annual increase in its dividend, based on the past two years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is Galenica an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest and Galenica paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Galenica's dividend merits.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we've discovered 2 warning signs for Galenica that you should be aware of before investing in their shares.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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