Is MAHLE Metal Leve S.A. (BVMF:LEVE3) A Risky Dividend Stock?

Could MAHLE Metal Leve S.A. (BVMF:LEVE3) 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 popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, MAHLE Metal Leve likely looks attractive to investors, given its 3.4% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on MAHLE Metal Leve!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, MAHLE Metal Leve paid out 13% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. MAHLE Metal Leve paid out a conservative 28% of its free cash flow as dividends last 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.

Consider getting our latest analysis on MAHLE Metal Leve'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. MAHLE Metal Leve has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was R$1.7 in 2011, compared to R$0.6 last year. This works out to be a decline of approximately 9.2% per year over that time. MAHLE Metal Leve's dividend has been cut sharply at least once, so it hasn't fallen by 9.2% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying MAHLE Metal Leve for its dividend, given that payments have shrunk over the past 10 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. Over the past five years, it looks as though MAHLE Metal Leve's EPS have declined at around 16% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It's great to see that MAHLE Metal Leve is paying out a low percentage of its earnings and cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In sum, we find it hard to get excited about MAHLE Metal Leve from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 4 warning signs for MAHLE Metal Leve that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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