Dividend paying stocks like McKesson Europe AG (HMSE:CLS1) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, McKesson Europe likely looks attractive to dividend investors, given its 3.2% dividend yield and four-year payment history. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding McKesson Europe for its dividend, and we'll focus on the most important aspects below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While McKesson Europe pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
With a strong net cash balance, McKesson Europe investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on McKesson Europe's financial position here.
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 data, we can see that McKesson Europe has been paying a dividend for the past four years. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. Its most recent annual dividend was €0.8 per share, effectively flat on its first payment four years ago.
It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Over the past five years, it looks as though McKesson Europe's EPS have declined at around 31% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
To summarise, shareholders should always check that McKesson Europe's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. McKesson Europe is paying out a dividend despite reporting a loss; clearly a concern. Earnings per share are down, and to our mind McKesson Europe has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In short, we're not keen on McKesson Europe from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for McKesson Europe (of which 2 are potentially serious!) you should know about.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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