June 18, 2024

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Does Carraro S.p.A. (BIT:CARR) Have A Place In Your Dividend Portfolio?

Could Carraro S.p.A. (BIT:CARR) 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 popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

Carraro pays a 7.8% dividend yield, and has been paying dividends for the past two years. A 7.8% yield does look good. Could the short payment history hint at future dividend growth? The company also bought back stock during the year, equivalent to approximately 10% of the company’s market capitalisation at the time. Some simple research can reduce the risk of buying Carraro for its dividend – read on to learn more.

Click the interactive chart for our full dividend analysis

BIT:CARR Historical Dividend Yield, March 4th 2020
BIT:CARR Historical Dividend Yield, March 4th 2020

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. Carraro paid out 90% 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. Unfortunately, while Carraro pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.

Is Carraro’s Balance Sheet Risky?

As Carraro 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). Carraro has net debt of 3.34 times its EBITDA, which is getting towards the limit of most investors’ comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Interest cover of 3.81 times its interest expense is starting to become a concern for Carraro, and be aware that lenders may place additional restrictions on the company as well.

Remember, you can always get a snapshot of Carraro’s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. This company’s dividend has been unstable, and with a relatively short history, we think it’s a little soon to draw strong conclusions about its long term dividend potential. During the past two-year period, the first annual payment was €0.17 in 2018, compared to €0.13 last year. Dividend payments have fallen sharply, down 24% over that time.

We struggle to make a case for buying Carraro for its dividend, given that payments have shrunk over the past two years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Carraro has grown its earnings per share at 37% per annum over the past five years. The company pays out most of its earnings as dividends, although with such rapid EPS growth, its possible the dividend is better covered than it looks. Still, we’d be cautious about extrapolating high growth too far out into the future.

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 Carraro has an acceptable payout ratio, although its dividend was not well covered by cashflow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Ultimately, Carraro comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 Carraro 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 protected]. 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.

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. Thank you for reading.

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