MTU Aero Engines (ETR:MTX) Is Reducing Its Dividend To €2.00

MTU Aero Engines AG's (ETR:MTX) dividend is being reduced from last year's payment covering the same period to €2.00 on the 14th of May. This means that the annual payment is 0.9% of the current stock price, which is lower than what the rest of the industry is paying.

Check out our latest analysis for MTU Aero Engines

MTU Aero Engines Is Paying Out More Than It Is Earning

Even a low dividend yield can be attractive if it is sustained for years on end. MTU Aero Engines is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in 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.

Over the next year, EPS is forecast to grow rapidly. If the dividend continues along recent trends, we estimate the payout ratio could reach 110%, which is unsustainable.

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. Since 2014, the annual payment back then was €1.35, compared to the most recent full-year payment of €2.00. This means that it has been growing its distributions at 4.0% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. MTU Aero Engines' earnings per share has shrunk at 25% a year over the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.