Is Siili Solutions Oyj (HEL:SIILI) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Investors might not know much about Siili Solutions Oyj’s dividend prospects, even though it has been paying dividends for the last six years and offers a 1.8% yield. While the yield may not look too great, the relatively long payment history is interesting. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Siili Solutions Oyj paid out 71% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 245%, Siili Solutions Oyj’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. Siili Solutions Oyj paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Siili Solutions Oyj’s ability to maintain its dividend.
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. Looking at the data, we can see that Siili Solutions Oyj has been paying a dividend for the past six years. It’s good to see that Siili Solutions 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 six-year period, the first annual payment was €0.11 in 2013, compared to €0.16 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.4% a year over that time. The dividends haven’t grown at precisely 6.4% every year, but this is a useful way to average out the historical rate of growth.
It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Siili Solutions Oyj might have put its house in order since then, but we remain cautious.
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. Siili Solutions Oyj’s earnings per share have been essentially flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation. 1.3% per annum is not a particularly high rate of growth, which we find curious. When a business is not growing, it often makes more sense to pay higher dividends to shareholders rather than retain the cash with no way to utilise it.
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. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. In summary, Siili Solutions Oyj has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.
See if management have their own wealth at stake, by checking insider shareholdings in Siili Solutions Oyj stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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