FLSmidth's (CPH:FLS) Shareholders Will Receive A Bigger Dividend Than Last Year

FLSmidth & Co. A/S (CPH:FLS) will increase its dividend from last year's comparable payment on the 15th of April to DKK4.00. Despite this raise, the dividend yield of 1.2% is only a modest boost to shareholder returns.

Check out our latest analysis for FLSmidth

FLSmidth's Dividend Is Well Covered By Earnings

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Prior to this announcement, FLSmidth's dividend was only 33% of earnings, however it was paying out 183% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Looking forward, earnings per share is forecast to rise by 141.0% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 13% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the annual payment back then was DKK2.00, compared to the most recent full-year payment of DKK4.00. This means that it has been growing its distributions at 7.2% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. FLSmidth might have put its house in order since then, but we remain cautious.

Dividend Growth May Be Hard To Come By

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. FLSmidth has seen earnings per share falling at 6.2% per year over the last five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

FLSmidth's Dividend Doesn't Look Sustainable

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

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for FLSmidth that you should be aware of before investing. Is FLSmidth not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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