Here's Why We're Wary Of Buying Clariant's (VTX:CLN) For Its Upcoming Dividend

It looks like Clariant AG (VTX:CLN) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Clariant's shares before the 30th of May in order to be eligible for the dividend, which will be paid on the 3rd of June.

The company's next dividend payment will be CHF00.42 per share, and in the last 12 months, the company paid a total of CHF0.42 per share. Based on the last year's worth of payments, Clariant has a trailing yield of 2.8% on the current stock price of CHF015.01. If you buy this business for its dividend, you should have an idea of whether Clariant's dividend is reliable and sustainable. As a result, readers should always check whether Clariant has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Clariant

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 82% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (64%) of its free cash flow in the past year, which is within an average range for most companies.

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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Clariant's earnings per share have been shrinking at 2.8% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Clariant has lifted its dividend by approximately 1.6% a year on average.

To Sum It Up

Has Clariant got what it takes to maintain its dividend payments? While earnings per share are shrinking, it's encouraging to see that at least Clariant's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: Clariant has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Clariant. Every company has risks, and we've spotted 2 warning signs for Clariant you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.