Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that FRoSTA Aktiengesellschaft (FRA:NLM) is about to go ex-dividend in just 3 days. This means that investors who purchase shares on or after the 20th of July will not receive the dividend, which will be paid on the 22nd of July.
FRoSTA’s next dividend payment will be €1.60 per share, and in the last 12 months, the company paid a total of €1.60 per share. Based on the last year’s worth of payments, FRoSTA stock has a trailing yield of around 2.3% on the current share price of €69.2. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Its dividend payout ratio is 86% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether FRoSTA generated enough free cash flow to afford its dividend. Fortunately, it paid out only 43% of its free cash flow in the past year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. FRoSTA’s earnings per share have fallen at approximately 6.1% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, ten years ago, FRoSTA has lifted its dividend by approximately 7.9% 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. FRoSTA 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.
The Bottom Line
Has FRoSTA got what it takes to maintain its dividend payments? We’re not enthused by the declining earnings per share, although at least the company’s payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. All things considered, we are not particularly enthused about FRoSTA from a dividend perspective.
So if you want to do more digging on FRoSTA, you’ll find it worthwhile knowing the risks that this stock faces. Every company has risks, and we’ve spotted 1 warning sign for FRoSTA you should know about.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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