Tread With Caution Around COVER 50 S.p.A.’s (BIT:COV) 6.5% Dividend Yield

Could COVER 50 S.p.A. (BIT:COV) 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 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 6.5% yield, many investors probably find COVER 50 intriguing. We’d agree the yield does look enticing. Some simple research can reduce the risk of buying COVER 50 for its dividend – read on to learn more.

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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. COVER 50 paid out 63% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.

With a strong net cash balance, COVER 50 investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on COVER 50’s financial position here.

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. Looking at the data, we can see that COVER 50 has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we’d like to see more evidence of consistency over a longer period. Its most recent annual dividend was €0.50 per share, effectively flat on its first payment four years ago.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn’t want to rely on this dividend too much.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. While there may be fluctuations in the past , COVER 50’s earnings per share have basically not grown from where they were five years ago. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation.

Conclusion

To summarise, shareholders should always check that COVER 50’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 COVER 50 has an acceptable payout ratio. Second, earnings per share have been in decline, and the dividend history is shorter than we’d like. With this information in mind, we think COVER 50 may not be an ideal dividend stock.

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. Case in point: We’ve spotted 4 warning signs for COVER 50 (of which 1 is a bit unpleasant!) you should know about.

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