Could Aena S.M.E., S.A. (BME:AENA) Have The Makings Of Another Dividend Aristocrat?
Dividend paying stocks like Aena S.M.E., S.A. (BME:AENA) 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.
With a four-year payment history and a 6.8% yield, many investors probably find Aena S.M.E intriguing. We’d agree the yield does look enticing. Remember that the recent share price drop will make Aena S.M.E’s yield look higher, even though recent events might have impacted the company’s prospects. Some simple analysis can reduce the risk of holding Aena S.M.E for its dividend, and we’ll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on Aena S.M.E!
BME:AENA Historical Dividend Yield May 20th 2020
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Aena S.M.E paid out 86% of its profit as dividends, over the trailing twelve month period. It’s paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 110%, Aena S.M.E’s dividend payments are poorly covered by cash flow. While Aena S.M.E’s dividends were covered by the company’s reported profits, free cash flow is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Aena S.M.E’s ability to maintain its dividend.
Is Aena S.M.E’s Balance Sheet Risky?
As Aena S.M.E has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With net debt of 2.53 times its EBITDA, Aena S.M.E has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 14.68 times its interest expense, Aena S.M.E’s interest cover is quite strong – more than enough to cover the interest expense.
Remember, you can always get a snapshot of Aena S.M.E’s latest financial position, by checking our visualisation of its financial health.
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. Aena S.M.E has been paying a dividend for the past four years. The dividend has not fluctuated much, but with a relatively short payment history, we can’t be sure this is sustainable across a full market cycle. During the past four-year period, the first annual payment was €2.71 in 2016, compared to €7.58 last year. This works out to be a compound annual growth rate (CAGR) of approximately 29% a year over that time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Aena S.M.E has grown its earnings per share at 22% per annum over the past five years. A majority of profits are being paid out as dividends, which raises the question of what happens to the current dividend if earnings decline. However, the rapid growth in earnings may indicate that is less of a risk.
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. First, we think Aena S.M.E has an acceptable payout ratio, although its dividend was not well covered by cashflow. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. In sum, we find it hard to get excited about Aena S.M.E from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we’ve picked out 3 warning signs for Aena S.M.E that investors should take into consideration.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
