Consider This Before Buying Talex S.A. (WSE:TLX) For The 5.7% Dividend

Today we’ll take a closer look at Talex S.A. (WSE:TLX) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

In this case, Talex likely looks attractive to dividend investors, given its 5.7% dividend yield and nine-year payment history. We’d agree the yield does look enticing. 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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WSE:TLX Historical Dividend Yield May 5th 2020
WSE:TLX Historical Dividend Yield May 5th 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. Talex paid out 75% 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.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Talex paid out 71% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It’s positive to see that Talex’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.

We update our data on Talex 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. The first recorded dividend for Talex, in the last decade, was 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 zł0.50 in 2011, compared to zł0.60 last year. Dividends per share have grown at approximately 2.0% per year over this time. The dividends haven’t grown at precisely 2.0% every year, but this is a useful way to average out the historical rate of growth.

We’re glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don’t think this is an attractive combination.

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. Talex’s EPS have fallen by approximately 23% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Talex’s earnings per share, which support the dividend, have been anything but stable.

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. First, we think Talex is paying out an acceptable percentage of its cashflow and profit. Earnings per share are down, and Talex’s dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think Talex may not be an ideal dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we’ve identified 5 warning signs for Talex (2 can’t be ignored!) that you should be aware of before investing.

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.

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.