Wacker Chemie's (ETR:WCH) Shareholders Will Receive A Bigger Dividend Than Last Year

Wacker Chemie AG (ETR:WCH) has announced that it will be increasing its dividend from last year's comparable payment on the 23rd of May to €12.00. This will take the dividend yield to an attractive 8.7%, providing a nice boost to shareholder returns.

View our latest analysis for Wacker Chemie

Wacker Chemie Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Wacker Chemie's dividend was only 48% of earnings, however it was paying out 129% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

Looking forward, earnings per share is forecast to fall by 42.7% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 135%, which could put the dividend under pressure if earnings don't start to improve.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2013, the dividend has gone from €0.60 total annually to €12.00. This implies that the company grew its distributions at a yearly rate of about 35% over that duration. 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

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Wacker Chemie has seen EPS rising for the last five years, at 28% per annum. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Wacker Chemie could prove to be a strong dividend payer.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Wacker Chemie's payments are rock solid. While Wacker Chemie is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for Wacker Chemie (1 is significant!) that you should be aware of before investing. 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.