Yahoo Finance Are Dividend Investors Making A Mistake With NV Bekaert SA (EBR:BEKB)?
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Dividend paying stocks like NV Bekaert SA (EBR:BEKB) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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.
A slim 2.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, NV Bekaert could have potential. The company also bought back stock during the year, equivalent to approximately 0.8% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying NV Bekaert for its dividend - read on to learn more.
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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. Looking at the data, we can see that 99% of NV Bekaert's profits were paid out as dividends in the last 12 months. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. NV Bekaert paid out 106% of its free cash flow last year, which we think is concerning if cash flows do not improve. Cash is slightly more important than profit from a dividend perspective, but given NV Bekaert's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Is NV Bekaert's Balance Sheet Risky?
As NV Bekaert's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With net debt of 2.70 times its EBITDA, NV Bekaert has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 2.49 times its interest expense, NV Bekaert's interest cover is starting to look a bit thin.
Consider getting our latest analysis on NV Bekaert's financial position here.
Dividend Volatility
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. NV Bekaert has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was €0.93 in 2009, compared to €0.70 last year. This works out to be a decline of approximately 2.8% per year over that time. NV Bekaert's dividend hasn't shrunk linearly at 2.8% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying NV Bekaert for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see NV Bekaert has grown its earnings per share at 11% per annum over the past five years. Although earnings per share are up nicely NV Bekaert is paying out 99% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
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. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, NV Bekaert has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 NV Bekaert analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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.
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. Thank you for reading.
