Today we’ll take a closer look at Matas A/S (CPH:MATAS) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, Matas likely looks attractive to dividend investors, given its 9.9% dividend yield and five-year payment history. We’d agree the yield does look enticing. The company also bought back stock equivalent to around 1.4% of market capitalisation this year. Some simple analysis can reduce the risk of holding Matas for its dividend, and we’ll focus on the most important aspects below.
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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Matas paid out 91% of its profit as dividends. With a payout ratio this high, we’d say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 78% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn.
Is Matas’s Balance Sheet Risky?
As Matas’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). With net debt of more than twice its EBITDA, Matas has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Matas has interest cover of more than 12 times its interest expense, which we think is quite strong.
We update our data on Matas every 24 hours, so you can always get our latest analysis of its financial health, here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that Matas has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ø5.50 in 2014, compared to ø6.30 last year. Dividends per share have grown at approximately 2.8% per year over this time.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Matas’s EPS are effectively flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation. Still, the company has struggled to grow its EPS, and currently pays out 91% of its earnings. As they say in finance, ‘past performance is not indicative of future performance’, but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend payer over the next decade.
To summarise, shareholders should always check that Matas’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re a bit uncomfortable with its high payout ratio, although we note cashflow was stronger than income. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we’d like. With this information in mind, we think Matas may not be an ideal dividend stock.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 3 analysts we track are forecasting for Matas for free with public analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.