Is AS Tallinna Vesi (TAL:TVEAT) A Good Dividend Stock?

Dividend paying stocks like AS Tallinna Vesi (TAL:TVEAT) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With AS Tallinna Vesi yielding 7.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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Payout ratios

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 90% of AS Tallinna Vesi's profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. With a cash payout ratio of 172%, AS Tallinna Vesi's dividend payments are poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. While AS Tallinna Vesi's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were AS Tallinna Vesi to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Remember, you can always get a snapshot of AS Tallinna Vesi's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of AS Tallinna Vesi's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was €1.6 in 2011, compared to €1.0 last year. The dividend has shrunk at around 4.6% a year during that period. AS Tallinna Vesi's dividend has been cut sharply at least once, so it hasn't fallen by 4.6% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying AS Tallinna Vesi for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. AS Tallinna Vesi has grown its earnings per share at 2.3% per annum over the past five years. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company is struggling to grow. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

Conclusion

To summarise, shareholders should always check that AS Tallinna Vesi's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. AS Tallinna Vesi gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In summary, AS Tallinna Vesi has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 4 warning signs for AS Tallinna Vesi you should be aware of, and 1 of them is a bit unpleasant.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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. 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.
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