Today we’ll take a closer look at MPH Health Care AG (ETR:93M) 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. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if MPH Health Care is a new dividend aristocrat in the making. It sure looks interesting on these metrics – but there’s always more to the story . Some simple analysis can reduce the risk of holding MPH Health Care for its dividend, and we’ll focus on the most important aspects below.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. 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. Although MPH Health Care pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
MPH Health Care paid out 1335% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.
Consider getting our latest analysis on MPH Health Care’s financial position here.
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. MPH Health Care has been paying a dividend for the past five years. During the past five-year period, the first annual payment was €0.12 in 2015, compared to €0.20 last year. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It’s not great to see that MPH Health Care’s have fallen at approximately 5.9% over the past five years. A modest decline in earnings per share is not great to see, but it doesn’t automatically make a dividend unsustainable. Still, we’d vastly prefer to see EPS growth when researching dividend stocks.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We’re a bit uncomfortable with MPH Health Care paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share have been falling, and the company has a relatively short dividend history – shorter than we like, anyway. There are a few too many issues for us to get comfortable with MPH Health Care from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in MPH Health Care stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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