Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see WashTec AG (ETR:WSU) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, WashTec investors that purchase the stock on or after the 17th of May will not receive the dividend, which will be paid on the 19th of May.
The company's next dividend payment will be €2.90 per share. Last year, in total, the company distributed €2.90 to shareholders. Based on the last year's worth of payments, WashTec stock has a trailing yield of around 5.9% on the current share price of €48.95. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether WashTec can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 90% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 41% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that WashTec's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. A high payout ratio of 90% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, WashTec could be signalling that its future growth prospects are thin.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. WashTec has delivered 25% dividend growth per year on average over the past 10 years.
The Bottom Line
Has WashTec got what it takes to maintain its dividend payments? It's unfortunate that earnings per share have not grown, and we'd note that WashTec is paying out lower percentage of its cashflow than its profit, but overall the dividend looks well covered by earnings. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
In light of that, while WashTec has an appealing dividend, it's worth knowing the risks involved with this stock. Case in point: We've spotted 1 warning sign for WashTec you should be aware of.
A common investing mistake is buying the first interesting stock you see. Here you can find a full 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.