Read This Before Considering RHI Magnesita N.V. (LON:RHIM) For Its Upcoming €1.00 Dividend

By
Simply Wall St
Published
June 05, 2021
LSE:RHIM
Source: Shutterstock

It looks like RHI Magnesita N.V. (LON:RHIM) is about to go ex-dividend in the next three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, RHI Magnesita investors that purchase the stock on or after the 10th of June will not receive the dividend, which will be paid on the 30th of June.

The company's upcoming dividend is €1.00 a share, following on from the last 12 months, when the company distributed a total of €2.00 per share to shareholders. Looking at the last 12 months of distributions, RHI Magnesita has a trailing yield of approximately 3.7% on its current stock price of £46.28. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for RHI Magnesita

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. RHI Magnesita paid out a disturbingly high 297% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 30% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and RHI Magnesita fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
LSE:RHIM Historic Dividend June 6th 2021

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at RHI Magnesita, with earnings per share up 4.7% on average over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, three years ago, RHI Magnesita has lifted its dividend by approximately 39% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Should investors buy RHI Magnesita for the upcoming dividend? RHI Magnesita has been slowly growing its earnings per share, and it has interesting dividend payout behaviour that we think is worth highlighting. Specifically, it's paying out just 30% of its cash flow but a huge 297% of its income. This is a interesting combination, but the high payout ratio is a definite concern. All things considered, we are not particularly enthused about RHI Magnesita from a dividend perspective.

However if you're still interested in RHI Magnesita as a potential investment, you should definitely consider some of the risks involved with RHI Magnesita. In terms of investment risks, we've identified 4 warning signs with RHI Magnesita and understanding them should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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