Dividend paying stocks like Dierig Holding AG (ETR:DIE) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
Investors might not know much about Dierig Holding’s dividend prospects, even though it has been paying dividends for the last nine years and offers a 1.5% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. 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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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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Dierig Holding paid out 35% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Dierig Holding paid out 15% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It’s positive to see that Dierig Holding’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Is Dierig Holding’s Balance Sheet Risky?
As Dierig Holding 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 is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. With net debt of 6.78 times its EBITDA, Dierig Holding could be described as a highly leveraged company. While some companies can handle this level of leverage, we’d be concerned about the dividend sustainability if there was any risk of an earnings downturn.
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 4.92 times its interest expense is starting to become a concern for Dierig Holding, and be aware that lenders may place additional restrictions on the company as well. Low interest cover and high debt can create problems right when the investor least needs them, and we’re reluctant to rely on the dividend of companies with these traits.
We update our data on Dierig Holding 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. Looking at the last decade of data, we can see that Dierig Holding paid its first dividend at least nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we’re cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was €0.15 in 2011, compared to €0.20 last year. Dividends per share have grown at approximately 3.2% per year over this time. Dierig Holding’s dividend payments have fluctuated, so it hasn’t grown 3.2% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Dierig Holding’s EPS have declined at around 11% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Dierig Holding’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Dierig Holding’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Dierig Holding has low and conservative payout ratios. Earnings per share are down, and Dierig Holding’s dividend has been cut at least once in the past, which is disappointing. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Dierig Holding out there.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, Dierig Holding has 4 warning signs (and 2 which are significant) we think you should know about.
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.
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