Is ProCredit Holding AG & Co. KGaA (ETR:PCZ) A Smart Pick For Income Investors?

Could ProCredit Holding AG & Co. KGaA (ETR:PCZ) 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. 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.

With a four-year payment history and a 3.6% yield, many investors probably find ProCredit Holding KGaA intriguing. We'd agree the yield does look enticing. That said, the recent jump in the share price will make ProCredit Holding KGaA's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, ProCredit Holding KGaA paid out 36% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

We update our data on ProCredit Holding KGaA 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. Looking at the data, we can see that ProCredit Holding KGaA has been paying a dividend for the past four years. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past four-year period, the first annual payment was €0.4 in 2017, compared to €0.3 last year. This works out to be a decline of approximately 5.7% per year over that time. ProCredit Holding KGaA's dividend has been cut sharply at least once, so it hasn't fallen by 5.7% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying ProCredit Holding KGaA for its dividend, given that payments have shrunk over the past four years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. In the last five years, ProCredit Holding KGaA's earnings per share have shrunk at approximately 4.8% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

To summarise, shareholders should always check that ProCredit Holding KGaA's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that ProCredit Holding KGaA has a low and conservative payout ratio. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, we're unenthused by ProCredit Holding KGaA as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for ProCredit Holding KGaA that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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