Sodexo S.A. (EPA:SW) has announced that it will be increasing its dividend from last year's comparable payment on the 28th of December to €2.40. This takes the dividend yield to 2.6%, which shareholders will be pleased with.
Our analysis indicates that SW is potentially overvalued!
Sodexo's Payment Has Solid Earnings Coverage
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. The last dividend was quite easily covered by Sodexo's earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
Over the next year, EPS is forecast to expand by 38.2%. If the dividend continues on this path, the payout ratio could be 35% by next year, which we think can be pretty sustainable going forward.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was €1.46 in 2012, and the most recent fiscal year payment was €2.40. This implies that the company grew its distributions at a yearly rate of about 5.1% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
Dividend Growth May Be Hard To Achieve
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. Unfortunately, Sodexo's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year.
In Summary
Overall, we always like to see the dividend being raised, but we don't think Sodexo will make a great income stock. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Sodexo has 2 warning signs (and 1 which can't be ignored) we think you should know about. Is Sodexo not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About ENXTPA:SW
Sodexo
Provides food services and facilities management services worldwide.
Solid track record with adequate balance sheet and pays a dividend.
