AlzChem Group AG (ETR:ACT) Is Yielding 3.0% - But Is It A Buy?

Today we'll take a closer look at AlzChem Group AG (ETR:ACT) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

AlzChem Group pays a 3.0% dividend yield, and has been paying dividends for the past three years. A 3.0% yield does look good. Could the short payment history hint at future dividend growth? Some simple research can reduce the risk of buying AlzChem Group for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on AlzChem Group!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. AlzChem Group paid out 39% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. AlzChem Group's cash payout ratio in the last year was 38%, which suggests dividends were well covered by cash generated by the business. It's positive to see that AlzChem Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Remember, you can always get a snapshot of AlzChem Group's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past three-year period, the first annual payment was €1.9 in 2018, compared to €0.8 last year. This works out to a decline of approximately 59% over that time.

We struggle to make a case for buying AlzChem Group for its dividend, given that payments have shrunk over the past three years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. AlzChem Group's EPS have fallen by approximately 33% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and AlzChem Group's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that AlzChem Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that AlzChem Group has low and conservative payout ratios. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than AlzChem Group out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for AlzChem Group that investors should know about before committing capital to this stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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