Stock Analysis

Should Elton International Trading Company S.A. (ATH:ELTON) Be Part Of Your Dividend Portfolio?

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ATSE:ELTON
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Is Elton International Trading Company S.A. (ATH:ELTON) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

In this case, Elton International Trading likely looks attractive to dividend investors, given its 4.3% dividend yield and seven-year payment history. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding Elton International Trading for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Elton International Trading!

historic-dividend
ATSE:ELTON Historic Dividend January 22nd 2021

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Elton International Trading paid out 46% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Elton International Trading paid out 127% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Elton International Trading 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 Elton International Trading to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

We update our data on Elton International Trading every 24 hours, so you can always get our latest analysis of its financial health, 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. Elton International Trading has been paying a dividend for the past seven years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past seven-year period, the first annual payment was €0.05 in 2014, compared to €0.06 last year. Dividends per share have grown at approximately 2.6% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

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. Elton International Trading's earnings per share have been essentially flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we like Elton International Trading's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. Ultimately, Elton International Trading comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 3 warning signs for Elton International Trading you should be aware of, and 1 of them is significant.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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