It Might Not Be A Great Idea To Buy Wüstenrot & Württembergische AG (ETR:WUW) For Its Next Dividend

It looks like Wüstenrot & Württembergische AG (ETR:WUW) is about to go ex-dividend in the next four days. Typically, the ex-dividend date is two business days 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 as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Wüstenrot & Württembergische's shares on or after the 23rd of May will not receive the dividend, which will be paid on the 27th of May.

The company's next dividend payment will be €0.65 per share, on the back of last year when the company paid a total of €0.65 to shareholders. Calculating the last year's worth of payments shows that Wüstenrot & Württembergische has a trailing yield of 4.3% on the current share price of €15.02. 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.

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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. Wüstenrot & Württembergische paid out 179% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

See our latest analysis for Wüstenrot & Württembergische

Click here to see how much of its profit Wüstenrot & Württembergische paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Wüstenrot & Württembergische's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 33% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Wüstenrot & Württembergische has delivered an average of 2.7% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Wüstenrot & Württembergische is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Wüstenrot & Württembergische got what it takes to maintain its dividend payments? Earnings per share are in decline and Wüstenrot & Württembergische is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

So if you're still interested in Wüstenrot & Württembergische despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 3 warning signs for Wüstenrot & Württembergische that you should be aware of before investing in their shares.

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.