Is Feintool International Holding AG (VTX:FTON) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
So you might want to consider getting our latest analysis on Feintool International Holding’s financial health here.
With Feintool International Holding yielding 3.4% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We’d guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Feintool International Holding for its dividend – read on to learn more.
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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Feintool International Holding paid out 53% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 211%, Feintool International Holding’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. While Feintool International Holding’s dividends were covered by the company’s reported profits, free cash flow is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Feintool International Holding’s ability to maintain its dividend.
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. For the purpose of this article, we only scrutinise the last decade of Feintool International Holding’s dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was CHF1.30 in 2009, compared to CHF2.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.4% a year over that time. The dividends haven’t grown at precisely 4.4% every year, but this is a useful way to average out the historical rate of growth.
It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. While there may be fluctuations in the past , Feintool International Holding’s earnings per share have basically not grown from where they were five years ago. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation. Growth of 1.4% is relatively anaemic growth, which we wonder about. If the company is struggling to grow, perhaps that’s why it elects to pay out more than half of its earnings to shareholders.
We’d also point out that Feintool International Holding issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
To summarise, shareholders should always check that Feintool International Holding’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Feintool International Holding has an acceptable payout ratio, although its dividend was not well covered by cashflow. Second, earnings have been essentially flat, and its history of dividend payments is chequered – having cut its dividend at least once in the past. With this information in mind, we think Feintool International Holding may not be an ideal dividend stock.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 4 analysts we track are forecasting for Feintool International Holding for free with public analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.