Don't Buy DSM-Firmenich AG (AMS:DSFIR) For Its Next Dividend Without Doing These Checks

DSM-Firmenich AG (AMS:DSFIR) stock is about to trade ex-dividend in 4 days. Typically, the ex-dividend date is two business days 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, DSM-Firmenich investors that purchase the stock on or after the 8th of May will not receive the dividend, which will be paid on the 16th of May.

The company's upcoming dividend is €2.50 a share, following on from the last 12 months, when the company distributed a total of €2.50 per share to shareholders. Calculating the last year's worth of payments shows that DSM-Firmenich has a trailing yield of 2.6% on the current share price of €95.02. If you buy this business for its dividend, you should have an idea of whether DSM-Firmenich's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Our free stock report includes 1 warning sign investors should be aware of before investing in DSM-Firmenich. Read for free now.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. An unusually high payout ratio of 265% of its profit suggests something is happening other than the usual distribution of profits to shareholders. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 65% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and DSM-Firmenich 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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

See our latest analysis for DSM-Firmenich

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see DSM-Firmenich's earnings per share have dropped 24% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. DSM-Firmenich's dividend payments per share have declined at 0.6% per year on average over the past two years, which is uninspiring.

Final Takeaway

Is DSM-Firmenich worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. Worse, DSM-Firmenich's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Bottom line: DSM-Firmenich has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with DSM-Firmenich. Case in point: We've spotted 1 warning sign for DSM-Firmenich you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.