Is AGRANA Beteiligungs-Aktiengesellschaft's (VIE:AGR) 4.3% Dividend Sustainable?

Today we'll take a closer look at AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) 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, AGRANA Beteiligungs-Aktiengesellschaft likely looks attractive to investors, given its 4.3% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding AGRANA Beteiligungs-Aktiengesellschaft for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on AGRANA Beteiligungs-Aktiengesellschaft!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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. AGRANA Beteiligungs-Aktiengesellschaft paid out 78% of its profit as dividends, over the trailing twelve month period. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 5,706%, AGRANA Beteiligungs-Aktiengesellschaft's dividend payments are poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. AGRANA Beteiligungs-Aktiengesellschaft paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to AGRANA Beteiligungs-Aktiengesellschaft's ability to maintain its dividend.

We update our data on AGRANA Beteiligungs-Aktiengesellschaft every 24 hours, so you can always get our latest analysis of its financial health, here.

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. AGRANA Beteiligungs-Aktiengesellschaft has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was €0.5 in 2011, compared to €0.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.7% a year over that time. The dividends haven't grown at precisely 4.7% every year, but this is a useful way to average out the historical rate of growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

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. In the last five years, AGRANA Beteiligungs-Aktiengesellschaft's earnings per share have shrunk at approximately 5.5% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

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. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. Earnings per share are down, and AGRANA Beteiligungs-Aktiengesellschaft's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with AGRANA Beteiligungs-Aktiengesellschaft from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 2 warning signs for AGRANA Beteiligungs-Aktiengesellschaft 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%.

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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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