It Might Not Be A Great Idea To Buy STINAG Stuttgart Invest AG (FRA:STG) For Its Next Dividend

It looks like STINAG Stuttgart Invest AG (FRA:STG) is about to go ex-dividend in the next four days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase STINAG Stuttgart Invest's shares before the 21st of May in order to be eligible for the dividend, which will be paid on the 23rd of May.

The company's next dividend payment will be €0.48 per share, on the back of last year when the company paid a total of €0.48 to shareholders. Based on the last year's worth of payments, STINAG Stuttgart Invest has a trailing yield of 3.8% on the current stock price of €12.80. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether STINAG Stuttgart Invest can afford its dividend, and if the dividend could grow.

Our free stock report includes 2 warning signs investors should be aware of before investing in STINAG Stuttgart Invest. Read for free now.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. STINAG Stuttgart Invest distributed an unsustainably high 137% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether STINAG Stuttgart Invest generated enough free cash flow to afford its dividend. It paid out more than half (56%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and STINAG Stuttgart Invest fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

See our latest analysis for STINAG Stuttgart Invest

Click here to see how much of its profit STINAG Stuttgart Invest paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see STINAG Stuttgart Invest's earnings per share have dropped 6.0% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. STINAG Stuttgart Invest has seen its dividend decline 4.4% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Should investors buy STINAG Stuttgart Invest for the upcoming dividend? Earnings per share have been shrinking in recent times. Worse, STINAG Stuttgart Invest's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of STINAG Stuttgart Invest don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 2 warning signs for STINAG Stuttgart Invest (1 doesn't sit too well with us) you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.