Does It Make Sense To Buy Admicasa Holding AG (BRN:ADMI) For Its Yield?

Today we'll take a closer look at Admicasa Holding AG (BRN:ADMI) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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, Admicasa Holding pays a decent-sized 3.5% dividend yield, and has been distributing cash to shareholders for the past two years. A 3.5% yield does look good. Could the short payment history hint at future dividend growth? Some simple research can reduce the risk of buying Admicasa Holding for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Admicasa Holding!

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. Although it reported a loss over the past 12 months, Admicasa Holding currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Unfortunately, while Admicasa Holding pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

We update our data on Admicasa Holding every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. Its most recent annual dividend was CHF0.2 per share, effectively flat on its first payment two years ago.

We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Admicasa Holding's earnings per share have shrunk at 143% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Admicasa Holding's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Admicasa Holding's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share are down, and to our mind Admicasa Holding has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Using these criteria, Admicasa Holding looks quite suboptimal from a dividend investment perspective.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 4 warning signs for Admicasa Holding (2 make us uncomfortable!) that you should be aware of before investing.

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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