Is Mineralbrunnen Überkingen-Teinach GmbH & Co. KGaA (FRA:MUT) An Attractive Dividend Stock?

Dividend paying stocks like Mineralbrunnen Überkingen-Teinach GmbH & Co. KGaA (FRA:MUT) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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 2.9% yield and a nine-year payment history, investors probably think Mineralbrunnen Überkingen-Teinach GmbH KGaA looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. The company also bought back stock equivalent to around 3.2% of market capitalisation this year. Some simple analysis can reduce the risk of holding Mineralbrunnen Überkingen-Teinach GmbH KGaA for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 43% of Mineralbrunnen Überkingen-Teinach GmbH KGaA's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Mineralbrunnen Überkingen-Teinach GmbH KGaA paid out 432% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Mineralbrunnen Überkingen-Teinach GmbH KGaA paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Mineralbrunnen Überkingen-Teinach GmbH KGaA's ability to maintain its dividend.

We update our data on Mineralbrunnen Überkingen-Teinach GmbH KGaA every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the last decade of data, we can see that Mineralbrunnen Überkingen-Teinach GmbH KGaA paid its first dividend at least nine years ago. It's good to see that Mineralbrunnen Überkingen-Teinach GmbH KGaA has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was €1.1 in 2012, compared to €0.5 last year. This works out to be a decline of approximately 9.6% per year over that time. Mineralbrunnen Überkingen-Teinach GmbH KGaA's dividend has been cut sharply at least once, so it hasn't fallen by 9.6% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

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. Mineralbrunnen Überkingen-Teinach GmbH KGaA's earnings per share shrank slightly over the past year or so. A short term decline in earnings is probably nothing to get worked up over, but we'd be looking to see a return to sustainable earnings growth. Still, we generally prefer companies generating even modest growth. Any one year of performance can be misleading for a variety of reasons, so we wouldn't like to form any strong conclusions based on these numbers alone.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Mineralbrunnen Überkingen-Teinach GmbH KGaA has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Earnings per share are down, and Mineralbrunnen Überkingen-Teinach GmbH KGaA's dividend has been cut at least once in the past, which is disappointing. In summary, Mineralbrunnen Überkingen-Teinach GmbH KGaA has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Mineralbrunnen Überkingen-Teinach GmbH KGaA that investors need to be conscious of moving forward.

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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