Sulzer (VTX:SUN) Will Pay A Smaller Dividend Than Last Year

Sulzer Ltd (VTX:SUN) is reducing its dividend to CHF3.50 on the 12th of April. The yield is still above the industry average at 65%.

See our latest analysis for Sulzer

Sulzer Doesn't Earn Enough To Cover Its Payments

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. The last payment made up 85% of earnings, but cash flows were much higher. This leaves plenty of cash for reinvestment into the business.

The next 12 months is set to see EPS grow by 24.2%. Assuming the dividend continues along recent trends, we think the payout ratio could get very high, which probably can't continue without starting to put some pressure on the balance sheet.

Sulzer Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2012, the first annual payment was CHF3.00, compared to the most recent full-year payment of CHF3.50. This means that it has been growing its distributions at 1.6% per annum over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Could Be Constrained

Investors could be attracted to the stock based on the quality of its payment history. Sulzer has impressed us by growing EPS at 19% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

In Summary

Even though the dividend was cut this year, we think Sulzer has the ability to make consistent payments in the future. With a reasonable track record and good earnings coverage, the payments look sustainable. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Earnings growth generally bodes well for the future value of company dividend payments. See if the 7 Sulzer analysts we track are forecasting continued growth with our free report on analyst estimates for the company. Is Sulzer not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.