Readers hoping to buy Bayer Aktiengesellschaft (ETR:BAYN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 29th of April to receive the dividend, which will be paid on the 4th of May.
Bayer’s next dividend payment will be €2.80 per share, and in the last 12 months, the company paid a total of €2.80 per share. Based on the last year’s worth of payments, Bayer has a trailing yield of 4.7% on the current stock price of €59.54. If you buy this business for its dividend, you should have an idea of whether Bayer’s dividend is reliable and sustainable. So we need to investigate whether Bayer can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Bayer
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Bayer distributed an unsustainably high 114% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Bayer generated enough free cash flow to afford its dividend. Fortunately, it paid out only 47% of its free cash flow in the past year.
It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Bayer fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we’re discomforted by Bayer’s 9.4% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Bayer has increased its dividend at approximately 7.2% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Bayer is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.
To Sum It Up
Is Bayer an attractive dividend stock, or better left on the shelf? It’s never great to see earnings per share declining, especially when a company is paying out 114% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mis-match between income and cashflow. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.
Having said that, if you’re looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Bayer. Case in point: We’ve spotted 5 warning signs for Bayer you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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