Faes Farma's (BME:FAE) Dividend Will Be Increased To €0.17

Faes Farma, S.A. (BME:FAE) will increase its dividend on the 23rd of December to €0.17. This takes the dividend yield to 5.9%, which shareholders will be pleased with.

Check out our latest analysis for Faes Farma

Faes Farma's Payment Has Solid Earnings Coverage

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, Faes Farma was paying out a very large proportion of what it was earning and 732% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Over the next year, EPS is forecast to fall by 1.8%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 92%, which is definitely on the higher side.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2011, the first annual payment was €0.069, compared to the most recent full-year payment of €0.20. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time. Faes Farma has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth May Be Hard To Achieve

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. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Faes Farma will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for Faes Farma that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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.

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