Przedsiebiorstwo Hydrauliki Silowej HYDROTOR S.A. (WSE:HDR) Is Yielding 3.5% - But Is It A Buy?

Could Przedsiebiorstwo Hydrauliki Silowej HYDROTOR S.A. (WSE:HDR) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. 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, Przedsiebiorstwo Hydrauliki Silowej HYDROTOR likely looks attractive to investors, given its 3.5% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Przedsiebiorstwo Hydrauliki Silowej HYDROTOR for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. In the last year, Przedsiebiorstwo Hydrauliki Silowej HYDROTOR paid out 40% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Przedsiebiorstwo Hydrauliki Silowej HYDROTOR paid out 24% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Przedsiebiorstwo Hydrauliki Silowej HYDROTOR 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 Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was zł1.3 in 2010, compared to zł1.0 last year. This works out to be a decline of approximately 2.2% per year over that time. Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's dividend hasn't shrunk linearly at 2.2% per annum, but the CAGR is a useful estimate of the historical rate of change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

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? It's not great to see that Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's have fallen at approximately 3.3% over the past five years. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

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 like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Earnings per share are down, and Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about Przedsiebiorstwo Hydrauliki Silowej HYDROTOR from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Przedsiebiorstwo Hydrauliki Silowej HYDROTOR has 3 warning signs (and 1 which is concerning) we think you should know about.

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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