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Today we'll take a closer look at Merkur Bank KGaA (ETR:MBK) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
In this case, Merkur Bank KGaA likely looks attractive to dividend investors, given its 3.4% dividend yield and nine-year payment history. We'd agree the yield does look enticing. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
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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. Merkur Bank KGaA paid out 50% of its profit as dividends, over the trailing twelve month period. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
Consider getting our latest analysis on Merkur Bank KGaA's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The first recorded dividend for Merkur Bank KGaA, in the last decade, was nine years ago. It's good to see that Merkur Bank KGaA has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was €0.17 in 2010, compared to €0.32 last year. Dividends per share have grown at approximately 7.3% per year over this time. The dividends haven't grown at precisely 7.3% every year, but this is a useful way to average out the historical rate of growth.
It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Merkur Bank KGaA might have put its house in order since then, but we remain cautious.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. While there may be fluctuations in the past , Merkur Bank KGaA's earnings per share have basically not grown from where they were five years ago. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. Growth of 1.0% is relatively anaemic growth, which we wonder about. When a business is not growing, it often makes more sense to pay higher dividends to shareholders rather than retain the cash with no way to utilise it.