Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see STINAG Stuttgart Invest AG (FRA:STG) is about to trade ex-dividend in the next 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. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, STINAG Stuttgart Invest investors that purchase the stock on or after the 21st of May will not receive the dividend, which will be paid on the 23rd of May.
The company's next dividend payment will be €0.48 per share, and in the last 12 months, the company paid a total of €0.48 per share. Based on the last year's worth of payments, STINAG Stuttgart Invest has a trailing yield of 3.8% on the current stock price of €12.80. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. STINAG Stuttgart Invest paid out 137% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 56% of its free cash flow as dividends, within the usual range for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and STINAG Stuttgart Invest 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.
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. STINAG Stuttgart Invest's earnings per share have fallen at approximately 6.0% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. STINAG Stuttgart Invest's dividend payments per share have declined at 4.4% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
To Sum It Up
Has STINAG Stuttgart Invest got what it takes to maintain its dividend payments? Earnings per share have been shrinking in recent times. Additionally, STINAG Stuttgart Invest is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that being said, if you're still considering STINAG Stuttgart Invest as an investment, you'll find it beneficial to know what risks this stock is facing. For example, STINAG Stuttgart Invest has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
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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.
