The Swatch Group AG's (VTX:UHR) dividend is being reduced from last year's payment covering the same period to CHF4.50 on the 27th of May. This means the annual payment is 3.4% of the current stock price, which is above the average for the industry.
Swatch Group's Payment Could Potentially Have Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before this announcement, Swatch Group was paying out 121% of what it was earning, and not generating any free cash flows either. This high of a dividend payment could start to put pressure on the balance sheet in the future.
According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 36%, which is in a comfortable range for us.
See our latest analysis for Swatch Group
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the annual payment back then was CHF7.50, compared to the most recent full-year payment of CHF4.50. Doing the maths, this is a decline of about 5.0% per year. A company that decreases its dividend over time generally isn't what we are looking for.
Dividend Growth Potential Is Shaky
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Swatch Group's earnings per share has shrunk at 23% a year over the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
Swatch Group's Dividend Doesn't Look Great
To sum up, we don't like when dividends are cut, but in this case the dividend may have been too high to begin with. The company isn't making enough to be paying as much as it is, and the other factors don't look particularly promising either. We don't think that this is a great candidate to be an income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Swatch Group has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Is Swatch Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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