Read This Before Buying Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA) For Its Dividend

Could Grenobloise d'Electronique et d'Automatismes Société Anonyme (EPA:GEA) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.

While Grenobloise d'Electronique et d'Automatismes Société Anonyme's 2.0% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple analysis can reduce the risk of holding Grenobloise d'Electronique et d'Automatismes Société Anonyme for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Grenobloise d'Electronique et d'Automatismes Société Anonyme!

Payout ratios

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 71% of Grenobloise d'Electronique et d'Automatismes Société Anonyme's profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Grenobloise d'Electronique et d'Automatismes Société Anonyme paid out 437% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Grenobloise d'Electronique et d'Automatismes Société Anonyme paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Cash is king, as they say, and were Grenobloise d'Electronique et d'Automatismes Société Anonyme to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

With a strong net cash balance, Grenobloise d'Electronique et d'Automatismes Société Anonyme investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Grenobloise d'Electronique et d'Automatismes Société Anonyme's financial position 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 Grenobloise d'Electronique et d'Automatismes Société Anonyme's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was €1.6 in 2010, compared to €2.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.8% a year over that time. Grenobloise d'Electronique et d'Automatismes Société Anonyme's dividend payments have fluctuated, so it hasn't grown 2.8% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

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 Grenobloise d'Electronique et d'Automatismes Société Anonyme's EPS have declined at around 15% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that Grenobloise d'Electronique et d'Automatismes Société Anonyme's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. 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. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Using these criteria, Grenobloise d'Electronique et d'Automatismes Société Anonyme looks quite suboptimal from a dividend investment perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 4 warning signs for Grenobloise d'Electronique et d'Automatismes Société Anonyme (of which 2 are significant!) you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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