Stock Analysis

Consider This Before Buying Thessaloniki Water Supply & Sewerage Co S.A. (ATH:EYAPS) For The 6.3% Dividend

ATSE:EYAPS
Source: Shutterstock

Today we'll take a closer look at Thessaloniki Water Supply & Sewerage Co S.A. (ATH:EYAPS) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

With Thessaloniki Water Supply & Sewerage Co yielding 6.3% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying Thessaloniki Water Supply & Sewerage Co for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Thessaloniki Water Supply & Sewerage Co!

historic-dividend
ATSE:EYAPS Historic Dividend January 15th 2021

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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 76% of Thessaloniki Water Supply & Sewerage Co's profits were paid out as dividends in the last 12 months. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. With a cash payout ratio of 94%, Thessaloniki Water Supply & Sewerage Co's dividend payments are poorly covered by cash flow. While Thessaloniki Water Supply & Sewerage Co's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Thessaloniki Water Supply & Sewerage Co's ability to maintain its dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Thessaloniki Water Supply & Sewerage Co's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Thessaloniki Water Supply & Sewerage Co's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Thessaloniki Water Supply & Sewerage Co's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was €0.1 in 2011, compared to €0.3 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.3% a year over that time. Thessaloniki Water Supply & Sewerage Co's dividend payments have fluctuated, so it hasn't grown 7.3% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

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 Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Earnings have grown at around 6.5% a year for the past five years, which is better than seeing them shrink! Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think Thessaloniki Water Supply & Sewerage Co has an acceptable payout ratio, although its dividend was not well covered by cashflow. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Overall, Thessaloniki Water Supply & Sewerage Co falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Thessaloniki Water Supply & Sewerage Co that you should be aware of before investing.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

If you’re looking to trade Thessaloniki Water Supply & Sewerage Co, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Thessaloniki Water Supply & Sewerage Co is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.