Fabasoft (ETR:FAA) Will Pay A Smaller Dividend Than Last Year

Fabasoft AG's (ETR:FAA) dividend is being reduced by 12% to €0.75 per share on 7th of July. The dividend yield of 3.4% is still a nice boost to shareholder returns, despite the cut.

See our latest analysis for Fabasoft

Fabasoft Doesn't Earn Enough To Cover Its Payments

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, the company's dividend was higher than its profits, and made up 85% of cash flows. This indicates that the company could be more focused on returning cash to shareholders than reinvesting to grow the business.

The next 12 months is set to see EPS grow by 29.2%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 121%, which probably can't continue putting some pressure on the balance sheet.

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. The first annual payment during the last 10 years was €0.075 in 2012, and the most recent fiscal year payment was €0.85. This implies that the company grew its distributions at a yearly rate of about 27% over that duration. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

Fabasoft Might Find It Hard To Grow Its Dividend

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. Fabasoft has seen EPS rising for the last five years, at 28% per annum. Strong earnings is nice to see, but unless this can be sustained on minimal reinvestment of profits, we would question whether dividends will follow suit.

The Dividend Could Prove To Be Unreliable

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for Fabasoft that you should be aware of before investing. Is Fabasoft not quite the opportunity you were looking for? Why not check out our selection of top 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.