WashTec (ETR:WSU) Is Increasing Its Dividend To €2.90

WashTec AG (ETR:WSU) has announced that it will be increasing its dividend on the 19th of May to €2.90. This makes the dividend yield 5.8%, which is above the industry average.

View our latest analysis for WashTec

WashTec Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, WashTec's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 121% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Earnings per share is forecast to rise by 7.0% over the next year. If the dividend continues on its recent course, the payout ratio in 12 months could be 116%, which is a bit high and could start applying pressure to the balance sheet.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The first annual payment during the last 10 years was €0.31 in 2012, and the most recent fiscal year payment was €2.90. This implies that the company grew its distributions at a yearly rate of about 25% over that duration. WashTec has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

WashTec May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that WashTec's earnings per share has fallen at approximately 3.0% per year over the past five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think WashTec's payments are rock solid. The payments are bit high to be considered sustainable, and the track record isn't the best. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for WashTec that investors need to be conscious of moving forward. 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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