Wirtek (CPH:WIRTEK) Is Reducing Its Dividend To DKK0.38

Wirtek A/S (CPH:WIRTEK) is reducing its dividend from last year's comparable payment to DKK0.38 on the 22nd of April. This means the annual payment is 3.5% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Wirtek

Wirtek's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. At the time of the last dividend payment, Wirtek was paying out a very large proportion of what it was earning and 133% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

If the trend of the last few years continues, EPS will grow by 28.2% over the next 12 months. Assuming the dividend continues along recent trends, we think the payout ratio could be 68% by next year, which is in a pretty sustainable range.

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 annual payment during the last 10 years was DKK0.09 in 2014, and the most recent fiscal year payment was DKK0.38. This implies that the company grew its distributions at a yearly rate of about 15% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Looks Likely To Grow

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. Wirtek has impressed us by growing EPS at 28% per year over the past five years. EPS is growing rapidly, although the company is also paying out a large portion of its profits as dividends. If earnings keep growing, the dividend may be sustainable, but generally we'd prefer to see a fast growing company reinvest in further growth.

In Summary

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 Wirtek is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

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. Taking the debate a bit further, we've identified 4 warning signs for Wirtek that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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