Dividend Investors: Don't Be Too Quick To Buy Paul Hartmann AG (FRA:PHH2) For Its Upcoming Dividend

It looks like Paul Hartmann AG (FRA:PHH2) is about to go ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Paul Hartmann's shares before the 29th of April in order to receive the dividend, which the company will pay on the 2nd of May.

The company's upcoming dividend is €8.00 a share, following on from the last 12 months, when the company distributed a total of €8.00 per share to shareholders. Last year's total dividend payments show that Paul Hartmann has a trailing yield of 3.8% on the current share price of €209.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Paul Hartmann

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Paul Hartmann paid out 100% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Paul Hartmann generated enough free cash flow to afford its dividend. Luckily it paid out just 24% of its free cash flow last year.

It's good to see that while Paul Hartmann's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see how much of its profit Paul Hartmann paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Paul Hartmann's 18% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Paul Hartmann has lifted its dividend by approximately 3.4% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Paul Hartmann is already paying out 100% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Paul Hartmann worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 100% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Paul Hartmann as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Paul Hartmann that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.