Why It Might Not Make Sense To Buy AMAG Austria Metall AG (VIE:AMAG) For Its Upcoming Dividend

AMAG Austria Metall AG (VIE:AMAG) stock is about to trade ex-dividend in three days. You will need to purchase shares before the 16th of April to receive the dividend, which will be paid on the 20th of April.

AMAG Austria Metall's next dividend payment will be €0.50 per share, on the back of last year when the company paid a total of €0.50 to shareholders. Based on the last year's worth of payments, AMAG Austria Metall has a trailing yield of 1.5% on the current stock price of €33.7. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for AMAG Austria Metall

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. AMAG Austria Metall distributed an unsustainably high 152% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and AMAG Austria Metall fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by AMAG Austria Metall's 22% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. AMAG Austria Metall's dividend payments per share have declined at 4.4% per year on average over the past nine years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Is AMAG Austria Metall worth buying for its dividend? It's not a great combination to see a company with earnings in decline and paying out 152% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: AMAG Austria Metall has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in AMAG Austria Metall despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 3 warning signs for AMAG Austria Metall (1 doesn't sit too well with us!) that you ought to be aware of before buying the shares.

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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