Are Dividend Investors Making A Mistake With Tikkurila Oyj (HEL:TIK1V)?

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Is Tikkurila Oyj (HEL:TIK1V) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.

With a 2.2% yield and a eight-year payment history, investors probably think Tikkurila Oyj looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. 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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HLSE:TIK1V Historical Dividend Yield, June 17th 2019
HLSE:TIK1V Historical Dividend Yield, June 17th 2019

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. Tikkurila Oyj paid out 100% of its profit as dividends, over the trailing twelve month period. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable – still, we think it is a concern.

We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 100%, Tikkurila Oyj’s dividend payments are poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Tikkurila Oyj’s payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.

Is Tikkurila Oyj’s Balance Sheet Risky?

As Tikkurila Oyj’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) 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). Tikkurila Oyj has net debt of less than two times its earnings before interest, tax, depreciation, and amortisation (EBITDA), which we think is not too troublesome.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 89.10 times its interest expense, Tikkurila Oyj’s interest cover is quite strong – more than enough to cover the interest expense.

Remember, you can always get a snapshot of Tikkurila Oyj’s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. The first recorded dividend for Tikkurila Oyj, in the last decade, was eight years ago. It’s good to see that Tikkurila Oyj has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was €0.70 in 2011, compared to €0.33 last year. This works out to be a decline of approximately 9.0% per year over that time. Tikkurila Oyj’s dividend hasn’t shrunk linearly at 9.0% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Tikkurila Oyj for its dividend, given that payments have shrunk over the past eight years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. In the last five years, Tikkurila Oyj’s earnings per share have shrunk at approximately 22% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Tikkurila Oyj paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Using these criteria, Tikkurila Oyj looks quite suboptimal from a dividend investment perspective.

Given that earnings are not growing, the dividend does not look nearly so attractive. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 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 editorial-team@simplywallst.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.