Covestro's (ETR:1COV) Dividend Will Be Increased To €3.40

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 takes the dividend yield to 7.5%, which shareholders will be pleased with.

View our latest analysis for Covestro

Covestro's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Covestro's dividend was comfortably covered by both cash flow and earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

Over the next year, EPS is forecast to fall by 19.1%. If the dividend continues along recent trends, we estimate the payout ratio could be 54%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Covestro's Dividend Has Lacked Consistency

Looking back, Covestro's dividend hasn't been particularly consistent. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2016, the dividend has gone from €0.70 to €3.40. This means that it has been growing its distributions at 30% per annum 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 16% per annum. Shareholders are getting plenty of the earnings returned to them, which combined with strong growth makes this quite appealing.

Covestro Looks Like A Great Dividend Stock

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. The earnings easily cover the company's distributions, and the company is generating plenty of cash. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 3 warning signs for Covestro (of which 1 is a bit unpleasant!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.