Should You Buy Servizi Italia S.p.A. (BIT:SRI) For Its Dividend?

Is Servizi Italia S.p.A. (BIT:SRI) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

A high yield and a long history of paying dividends is an appealing combination for Servizi Italia. We'd guess that plenty of investors have purchased it for the income. The company also returned around 3.5% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying Servizi Italia for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Servizi Italia!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 343% of Servizi Italia's profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 89% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Servizi Italia fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

We update our data on Servizi Italia every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Servizi Italia'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 €0.2 in 2010, compared to €0.1 last year. The dividend has shrunk at around 2.5% a year during that period. Servizi Italia's dividend has been cut sharply at least once, so it hasn't fallen by 2.5% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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. Servizi Italia's EPS have fallen by approximately 39% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Servizi Italia's earnings per share, which support the dividend, have been anything but stable.

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. We're not keen on the fact that Servizi Italia paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and Servizi Italia's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Servizi Italia from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 5 warning signs for Servizi Italia that investors should take into consideration.

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