Does IFA Hotel & Touristik Aktiengesellschaft (FRA:IFA) Have A Place In Your Dividend Stock Portfolio?
Simply Wall St
5 min read
Is IFA Hotel & Touristik Aktiengesellschaft (FRA:IFA) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With a 2.9% yield and a seven-year payment history, investors probably think IFA Hotel & Touristik looks like a reliable dividend stock. A 2.9% yield is not inspiring, but the longer payment history has some appeal. Remember that the recent share price drop will make IFA Hotel & Touristik's yield look higher, even though recent events might have impacted the company's prospects. Some simple analysis can reduce the risk of holding IFA Hotel & Touristik for its dividend, and we'll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although it reported a loss over the past 12 months, IFA Hotel & Touristik currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Unfortunately, while IFA Hotel & Touristik pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.
While the above analysis focuses on dividends relative to a company's earnings, we do note IFA Hotel & Touristik's strong net cash position, which will let it pay larger dividends for a time, should it choose.
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. IFA Hotel & Touristik 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 €0.20 in 2013, compared to €0.12 last year. This works out to be a decline of approximately 7.0% per year over that time. IFA Hotel & Touristik's dividend hasn't shrunk linearly at 7.0% per annum, but the CAGR is a useful estimate of the historical rate of change.
A shrinking dividend over a seven-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
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though IFA Hotel & Touristik's EPS have declined at around 3.7% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
We'd also point out that IFA Hotel & Touristik issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
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 a bit uncomfortable with IFA Hotel & Touristik paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with IFA Hotel & Touristik from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for IFA Hotel & Touristik that investors should know about before committing capital to this stock.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
