Today we’ll take a closer look at Fountaine Pajot SA (EPA:ALFPC) 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. 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.
With a 1.1% yield and a five-year payment history, investors probably think Fountaine Pajot looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. The company also bought back stock during the year, equivalent to approximately 2.6% of the company’s market capitalisation at the time. There are a few simple ways to reduce the risks of buying Fountaine Pajot for its dividend, and we’ll go through these below.
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Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Looking at the data, we can see that 19% of Fountaine Pajot’s profits were paid out as dividends in the last 12 months. We’d say its dividends are thoroughly covered by earnings.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Fountaine Pajot’s cash payout ratio last year was 7.1%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.
Consider getting our latest analysis on Fountaine Pajot’s financial position here.
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. Looking at the data, we can see that Fountaine Pajot has been paying a dividend for the past five years. During the past five-year period, the first annual payment was €0.20 in 2014, compared to €1.20 last year. Dividends per share have grown at approximately 43% per year over this time.
Fountaine Pajot has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Fountaine Pajot has grown its EPS 80% over the past 12 months. It’s good to see earnings per share rising, but one year is too short a period to get excited about. Were this trend to continue, we’d be interested. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively. We do note though, one year is too short a time to be drawing strong conclusions about a company’s future prospects.
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. Firstly, we like that Fountaine Pajot has low and conservative payout ratios. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Overall we think Fountaine Pajot scores well on our analysis. It’s not quite perfect, but we’d definitely be keen to take a closer look.
See if management have their own wealth at stake, by checking insider shareholdings in Fountaine Pajot stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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If you spot an error that warrants correction, please contact the editor at email@example.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.