Looking For Steady Income For Your Dividend Portfolio? Is Rexel S.A. (EPA:RXL) A Good Fit?

Dividend paying stocks like Rexel S.A. (EPA:RXL) 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. 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.

A slim 3.0% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Rexel could have potential. That said, the recent jump in the share price will make Rexel's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Rexel for its dividend, and we'll go through these below.

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Payout ratios

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. Although Rexel pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

We update our data on Rexel every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Rexel'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 €0.4 in 2011, compared to €0.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.4% a year over that time. The dividends haven't grown at precisely 1.4% every year, but this is a useful way to average out the historical rate of growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Over the past five years, it looks as though Rexel's EPS have declined at around 41% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Rexel's earnings per share, which support the dividend, have been anything but stable.

Conclusion

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. We're a bit uncomfortable with it paying a dividend while reporting a loss over the past year. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. With this information in mind, we think Rexel may not be an ideal dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 3 warning signs for Rexel (1 is concerning!) that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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