MTU Aero Engines' (ETR:MTX) Dividend Will Be Reduced To €2.00

MTU Aero Engines AG (ETR:MTX) is reducing its dividend from last year's comparable payment to €2.00 on the 13th of May. This means that the dividend yield is 0.9%, which is a bit low when comparing to other companies in the industry.

See our latest analysis for MTU Aero Engines

MTU Aero Engines' Dividend Is Well Covered By Earnings

Even a low dividend yield can be attractive if it is sustained for years on end. While MTU Aero Engines is not profitable, it is paying out less than 75% of its free cash flow, which means that there is plenty left over for reinvestment into the business. We generally think that cash flow is more important than accounting measures of profit, so we are fairly comfortable with the dividend at this level.

According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 60%, so there isn't too much pressure on the dividend.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of €1.35 in 2014 to the most recent total annual payment of €2.00. This implies that the company grew its distributions at a yearly rate of about 4.0% over that duration. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

The Dividend Has Limited Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings per share has been sinking by 25% over the last five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

MTU Aero Engines' Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Given that earnings are not growing, the dividend does not look nearly so attractive. See if the 15 analysts are forecasting a turnaround in our free collection of analyst estimates here. Is MTU Aero Engines not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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