Three Things You Should Check Before Buying Swiss Prime Site AG (VTX:SPSN) For Its Dividend

Today we'll take a closer look at Swiss Prime Site AG (VTX:SPSN) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Swiss Prime Site likely looks attractive to investors, given its 3.9% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Swiss Prime Site for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Swiss Prime Site!

Payout ratios

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. Swiss Prime Site paid out 42% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Swiss Prime Site paid out 104% of its free cash flow last year, which we think is concerning if cash flows do not improve. While Swiss Prime Site'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 Swiss Prime Site's ability to maintain its dividend.

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

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Swiss Prime Site's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was CHF3.5 in 2011, compared to CHF3.4 last year. The dividend has shrunk at a rate of less than 1% a year over this period.

We struggle to make a case for buying Swiss Prime Site for its dividend, given that payments have shrunk over the past 10 years.

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. Swiss Prime Site has grown its earnings per share at 8.7% per annum over the past five years. Earnings per share have been growing at a credible rate. What's more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Swiss Prime Site has a low payout ratio, which we like, although it paid out virtually all of its generated cash. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Overall we think Swiss Prime Site is an interesting dividend stock, although it could be better.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 4 warning signs for Swiss Prime Site you should be aware of, and 2 of them can't be ignored.

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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