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Dividend paying stocks like Compagnie Du Mont-Blanc (EPA:MLCMB) 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. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
With a 2.8% yield and a nine-year payment history, investors probably think Compagnie Du Mont-Blanc looks like a reliable dividend stock. A 2.8% yield is not inspiring, but the longer payment history has some appeal. There are a few simple ways to reduce the risks of buying Compagnie Du Mont-Blanc 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, Compagnie Du Mont-Blanc paid out 40% of its profit as dividends. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 51% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Compagnie Du Mont-Blanc has available to meet other needs. 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.
Remember, you can always get a snapshot of Compagnie Du Mont-Blanc’s latest financial position, by checking our visualisation of its financial health.
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. The first recorded dividend for Compagnie Du Mont-Blanc, in the last decade, was nine years ago. The dividend has been quite stable over the past nine years, which is great to see – although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past nine-year period, the first annual payment was €3.00 in 2010, compared to €4.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.2% a year over that time.
Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn’t want to rely on this dividend too much.
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. Compagnie Du Mont-Blanc has grown its EPS 9.1% 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 been growing at a credible rate. What’s more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it. We do note though, one year is too short a time to be drawing strong conclusions about a company’s future prospects.
To summarise, shareholders should always check that Compagnie Du Mont-Blanc’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Compagnie Du Mont-Blanc pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we’d like. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Compagnie Du Mont-Blanc out there.
See if management have their own wealth at stake, by checking insider shareholdings in Compagnie Du Mont-Blanc stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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.