Covestro (ETR:1COV) Will Pay A Larger Dividend Than Last Year At €3.40

By
Simply Wall St
Published
April 20, 2022
XTRA:1COV
Source: Shutterstock

The board of Covestro AG (ETR:1COV) has announced that it will be increasing its dividend on the 26th of April to €3.40. This makes the dividend yield 7.6%, which is above the industry average.

Check out our latest analysis for Covestro

Covestro's Earnings Easily Cover the Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, Covestro was quite comfortably earning enough to cover the dividend. This means that a large portion of its earnings are being retained to grow the business.

EPS is set to fall by 21.0% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could be 55%, which we are pretty comfortable with and we think is feasible on an earnings basis.

historic-dividend
XTRA:1COV Historic Dividend April 20th 2022

Covestro's Dividend Has Lacked Consistency

It's comforting to see that Covestro has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. Since 2016, the dividend has gone from €0.70 to €3.40. This works out to be a compound annual growth rate (CAGR) of approximately 30% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Covestro has seen EPS rising for the last five years, at 17% per annum. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.

Covestro Looks Like A Great Dividend Stock

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The distributions are easily covered by earnings, and there is plenty of cash being generated as well. We should point out that the earnings are expected to fall over the next 12 months, which won't be a problem if this doesn't become a trend, but could cause some turbulence in the next year. All in all, this checks a lot of the boxes we look for when choosing an income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Covestro has 3 warning signs (and 1 which can't be ignored) we think you should know about. 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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