Is Peugeot S.A. (EPA:UG) A Smart Pick For Income Investors?

Could Peugeot S.A. (EPA:UG) 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 nine-year payment history and a 4.1% yield, many investors probably find Peugeot intriguing. We’d agree the yield does look enticing. Some simple analysis can reduce the risk of holding Peugeot for its dividend, and we’ll focus on the most important aspects below.

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ENXTPA:UG Historical Dividend Yield, January 31st 2020
ENXTPA:UG Historical Dividend Yield, January 31st 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. 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. Looking at the data, we can see that 22% of Peugeot’s profits were paid out as dividends in the last 12 months. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Peugeot paid out 19% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It’s positive to see that Peugeot’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.

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

Consider getting our latest analysis on Peugeot’s financial position 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. Looking at the last decade of data, we can see that Peugeot paid its first dividend at least nine years ago. It’s good to see that Peugeot has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was €1.10 in 2011, compared to €0.78 last year. This works out to be a decline of approximately 3.7% per year over that time. Peugeot’s dividend hasn’t shrunk linearly at 3.7% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Peugeot for its dividend, given that payments have shrunk over the past nine years.

Dividend Growth Potential

With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Peugeot has grown its earnings per share at 55% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It’s great to see that Peugeot is paying out a low percentage of its earnings and cash flow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. All things considered, Peugeot looks like a strong prospect. At the right valuation, it could be something special.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 18 analysts we track are forecasting for Peugeot for free with public analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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.