Is Groupe ADP (EPA:ADP) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
A high yield and a long history of paying dividends is an appealing combination for Groupe ADP. It would not be a surprise to discover that many investors buy it for the dividends. Remember though, given the recent drop in its share price, Groupe ADP’s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. Some simple analysis can reduce the risk of holding Groupe ADP for its dividend, and we’ll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on Groupe ADP!
ENXTPA:ADP Historical Dividend Yield April 24th 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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Groupe ADP paid out 69% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Groupe ADP paid out 105% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. While Groupe ADP’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 Groupe ADP’s ability to maintain its dividend.
Is Groupe ADP’s Balance Sheet Risky?
As Groupe ADP has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. 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 2.92 times its EBITDA, Groupe ADP 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. Groupe ADP has EBIT of 5.35 times its interest expense, which we think is adequate.
We update our data on Groupe ADP every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Groupe ADP has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was €1.37 in 2010, compared to €3.70 last year. Dividends per share have grown at approximately 10% per year over this time. Groupe ADP’s dividend payments have fluctuated, so it hasn’t grown 10% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
Groupe ADP has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.
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. Earnings have grown at around 5.8% a year for the past five years, which is better than seeing them shrink! The rate at which earnings have grown is quite decent, and by paying out more than half of its earnings as dividends, the company is striking a reasonable balance between reinvestment and returns to shareholders.
Conclusion
To summarise, shareholders should always check that Groupe ADP’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Groupe ADP has an acceptable payout ratio, although its dividend was not well covered by cashflow. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Overall, Groupe ADP falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we’ve picked out 3 warning signs for Groupe ADP that investors should know about before committing capital to this stock.
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.
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.