The board of ElringKlinger AG (ETR:ZIL2) has announced that it will pay a dividend on the 21st of May, with investors receiving €0.15 per share. This means the annual payment is 3.2% of the current stock price, which is above the average for the industry.
A big dividend yield for a few years doesn’t mean much if it can’t be sustained. While ElringKlinger is not profitable, it is paying out less than 75% of its free cash flow, which means that there is plenty left over for reinvestment into the business. We generally think that cash flow is more important than accounting measures of profit, so we are fairly comfortable with the dividend at this level.
Analysts expect a massive rise in earnings per share in the next year. If the dividend extends its recent trend, estimates say the dividend could reach 0.9%, which we would be comfortable to see continuing.
See our latest analysis for ElringKlinger
The company has a long dividend track record, but it doesn’t look great with cuts in the past. Since 2015, the annual payment back then was €0.55, compared to the most recent full-year payment of €0.15. The dividend has fallen 73% over that period. Declining dividends isn’t generally what we look for as they can indicate that the company is running into some challenges.
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. ElringKlinger’s earnings per share has shrunk at 10% a year over the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
Overall, it’s nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The payments haven’t been particularly stable and we don’t see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don’t think ElringKlinger is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we’ve identified 1 warning sign for ElringKlinger that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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