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Could Tikkurila Oyj (HEL:TIK1V) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.
Investors might not know much about Tikkurila Oyj's dividend prospects, even though it has been paying dividends for the last eight years and offers a 2.2% yield. A 2.2% yield is not inspiring, but the longer payment history has some appeal. There are a few simple ways to reduce the risks of buying Tikkurila Oyj 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 100% of Tikkurila Oyj's profits were paid out as dividends in the last 12 months. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Tikkurila Oyj paid out 100% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. As Tikkurila Oyj's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Is Tikkurila Oyj's Balance Sheet Risky?
As Tikkurila Oyj's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick way to check a company's financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. Tikkurila Oyj has net debt of less than two times its earnings before interest, tax, depreciation, and amortisation (EBITDA), which we think is not too troublesome.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Tikkurila Oyj has interest cover of more than 12 times its interest expense, which we think is quite strong.
We update our data on Tikkurila Oyj 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. The first recorded dividend for Tikkurila Oyj, in the last decade, was eight years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past eight-year period, the first annual payment was €0.70 in 2011, compared to €0.33 last year. This works out to be a decline of approximately 9.0% per year over that time. Tikkurila Oyj's dividend has been cut sharply at least once, so it hasn't fallen by 9.0% every year, but this is a decent approximation of the long term change.
When a company's per-share dividend falls we question if this reflects poorly on either the business or management. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's not great to see that Tikkurila Oyj's have fallen at approximately 22% 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.
To summarise, shareholders should always check that Tikkurila Oyj's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Tikkurila Oyj paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Tikkurila Oyj 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. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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 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. Thank you for reading.