Dividend paying stocks like Grifal S.p.A. (BIT:GRAL) 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. 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.
Some readers mightn’t know much about Grifal’s 1.3% dividend, as it has only been paying distributions for a year or so. Remember though, given the recent drop in its share price, Grifal’s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. There are a few simple ways to reduce the risks of buying Grifal for its dividend, and we’ll go through these below.
Explore this interactive chart for our latest analysis on Grifal!
BIT:GRAL Historical Dividend Yield April 20th 2020
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Grifal paid out 40% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while Grifal pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.
Is Grifal’s Balance Sheet Risky?
As Grifal 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 1.83 times its EBITDA, Grifal has an acceptable level of debt.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. With EBIT of 3.62 times its interest expense, Grifal’s interest cover is starting to look a bit thin.
Remember, you can always get a snapshot of Grifal’s latest financial position, by checking our visualisation of its financial health.
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. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Its most recent annual dividend was €0.03 per share.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Grifal’s earnings per share are up 274% on last year. It’s good to see earnings per share rising, but one year is too short a period to get excited about. Were this trend to continue, we’d be interested. With high earnings per share growth in recent times and a modest payout ratio, we think this is an attractive combination if earnings can be reinvested to generate further growth. We do note though, one year is too short a time to be drawing strong conclusions about a company’s future prospects.
We’d also point out that Grifal issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental – it’s hard to grow dividends per share when new shares are regularly being created.
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. Firstly, the company has a conservative payout ratio, although we’d note that its cashflow in the past year was substantially lower than its reported profit. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. In sum, we find it hard to get excited about Grifal 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.
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 instance, we’ve picked out 4 warning signs for Grifal that investors should take into consideration.
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 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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