Are Dividend Investors Making A Mistake With paragon GmbH & Co. KGaA (ETR:PGN)?

By
Simply Wall St
Published
June 29, 2020

Could paragon GmbH & Co. KGaA (ETR:PGN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a seven-year payment history and a 3.2% yield, many investors probably find paragon GmbH KGaA intriguing. It sure looks interesting on these metrics - but there's always more to the story . Some simple research can reduce the risk of buying paragon GmbH KGaA for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on paragon GmbH KGaA!

XTRA:PGN Historical Dividend Yield June 29th 2020

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although paragon GmbH KGaA pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Unfortunately, while paragon GmbH KGaA 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 paragon GmbH KGaA 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. paragon GmbH KGaA has been paying a dividend for the past seven years. The dividend has been quite stable over the past seven years, which is great to see - although we usually like to see the dividend maintained for a decade before giving it full marks, though. Its most recent annual dividend was €0.25 per share, effectively flat on its first payment seven years ago.

It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

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. paragon GmbH KGaA's EPS have fallen by approximately 46% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and paragon GmbH KGaA's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that paragon GmbH KGaA's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Earnings per share are down, and to our mind paragon GmbH KGaA has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In this analysis, paragon GmbH KGaA doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, paragon GmbH KGaA has 4 warning signs (and 1 which is significant) we think you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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