Is Etex N.V. (EBR:094124453) A Smart Pick For Income Investors?

Today we'll take a closer look at Etex N.V. (EBR:094124453) 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.

With a 2.0% yield and a six-year payment history, investors probably think Etex looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. Some simple analysis can reduce the risk of holding Etex for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

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. In the last year, Etex paid out 13% of its profit as dividends. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

We update our data on Etex 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. Looking at the data, we can see that Etex has been paying a dividend for the past six years. 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 six-year period, the first annual payment was €0.4 in 2015, compared to €0.3 last year. This works out to be a decline of approximately 5.2% per year over that time. Etex's dividend has been cut sharply at least once, so it hasn't fallen by 5.2% every year, but this is a decent approximation of the long term change.

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

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's good to see Etex has been growing its earnings per share at 14% a year over the past five years. Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Conclusion

To summarise, shareholders should always check that Etex's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see Etex has a low payout ratio, as this suggests earnings are being reinvested in the business. 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. Etex has a number of positive attributes, but falls short of our ideal dividend company. It may be worth a look at the right price, though.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 2 warning signs for Etex you should be aware of, and 1 of them is a bit unpleasant.

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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