Today we’ll take a closer look at Lassila & Tikanoja Oyj (HEL:LAT1V) 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. 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.
A high yield and a long history of paying dividends is an appealing combination for Lassila & Tikanoja Oyj. It would not be a surprise to discover that many investors buy it for the dividends. The company also bought back stock equivalent to around 1.0% of market capitalisation this year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
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HLSE:LAT1V Historical Dividend Yield April 20th 2020
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. 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. In the last year, Lassila & Tikanoja Oyj paid out 102% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 62% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Lassila & Tikanoja Oyj has available to meet other needs. It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Lassila & Tikanoja Oyj fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Is Lassila & Tikanoja Oyj’s Balance Sheet Risky?
As Lassila & Tikanoja Oyj’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and 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 0.79 times its EBITDA, Lassila & Tikanoja Oyj has an acceptable level of debt.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Net interest cover of 11.38 times its interest expense appears reasonable for Lassila & Tikanoja Oyj, although we’re conscious that even high interest cover doesn’t make a company bulletproof.
Consider getting our latest analysis on Lassila & Tikanoja Oyj’s financial position here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Lassila & Tikanoja Oyj has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past ten-year period, the first annual payment was €0.55 in 2010, compared to €0.92 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.3% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Lassila & Tikanoja Oyj might have put its house in order since then, but we remain cautious.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Lassila & Tikanoja Oyj has grown its earnings per share at 14% per annum over the past five years. While EPS are growing rapidly, Lassila & Tikanoja Oyj paid out a very high 102% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.
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 not keen on the fact that Lassila & Tikanoja Oyj paid out such a high percentage of its income, although its cashflow is in better shape. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In sum, we find it hard to get excited about Lassila & Tikanoja Oyj 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.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Just as an example, we’ve come accross 4 warning signs for Lassila & Tikanoja Oyj you should be aware of, and 1 of them is potentially serious.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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.
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