Today we'll take a closer look at TIER 1 Technology, S.A. (BME:TR1) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
Some readers mightn't know much about TIER 1 Technology's 2.4% dividend, as it has only been paying distributions for the last two years. While it may not look like much, if earnings are growing it could become quite interesting. There are a few simple ways to reduce the risks of buying TIER 1 Technology for its dividend, and we'll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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. In the last year, TIER 1 Technology paid out 59% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. TIER 1 Technology's cash payout ratio last year was 19%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
While the above analysis focuses on dividends relative to a company's earnings, we do note TIER 1 Technology's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of TIER 1 Technology's latest financial position, by checking our visualisation of its financial health.
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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. Its most recent annual dividend was €0.4 per share, effectively flat on its first payment two years ago.
We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. TIER 1 Technology's earnings per share are up 1.0% on last year. We're glad to see EPS up on last year, but we're conscious that growth rates typically slow as companies increase in size. 1.0% per annum is not a particularly high rate of growth, which we find curious. If the company is struggling to grow, perhaps that's why it elects to pay out more than half of its earnings to shareholders. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. TIER 1 Technology's payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Unfortunately, there hasn't been any earnings growth, and the company's dividend history is shorter than the 10 years we ideally like to see before making a strong judgement. Ultimately, TIER 1 Technology comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
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. Case in point: We've spotted 3 warning signs for TIER 1 Technology (of which 1 is a bit concerning!) you should know about.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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