Readers hoping to buy InnoTec TSS SA (FRA:TSS) for its dividend will have to come shortly, as the stock is set to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is important because the settlement process involves two full business days. So if you miss this date, you will not be on the company’s books as of the record date. In other words, investors can buy shares of InnoTec TSS before June 20 in order to be eligible for the dividend, which will be paid on June 22.
The company’s next dividend payment will be €0.75 per share, after last year when the company paid a total of €0.75 to shareholders. Looking at the last 12 months of distributions, InnoTec TSS has a rolling yield of around 7.0% on its current price of €10.75. We love to see companies pay out a dividend, but it’s also important to make sure that laying the golden eggs doesn’t kill our golden hen! We therefore need to consider whether InnoTec TSS can afford its dividend, and whether the dividend could increase.
Check out our latest review for InnoTec TSS
Dividends are usually paid out of company profits. If a company pays more in dividends than it earns in profits, then the dividend could be unsustainable. Its dividend payout ratio is 82% of earnings, meaning the company pays out the majority of its earnings. The relatively limited reinvestment of earnings could slow the rate of future earnings growth. We would be concerned if earnings started to decline. A useful secondary check may be to assess whether InnoTec TSS has generated sufficient free cash flow to pay its dividend. It has paid out an unsustainable 258% of its free cash flow in dividends over the past 12 months, which is worrying. It’s pretty hard to pay more than you earn, so we wonder how InnoTec TSS intends to continue funding this dividend, or if it might be forced to reduce the payout.
InnoTec TSS has significant net cash on the balance sheet, which could fund large dividends for some time, if the company wanted. Yet savvy investors know that dividends are best valued against the cash and profits generated by the company. Paying cash dividends on the balance sheet is unsustainable in the long term.
InnoTec TSS paid less dividends than it reported earnings, but unfortunately it did not generate enough cash to cover the dividend. If this were to happen again, it would pose a risk to InnoTec TSS’s ability to maintain its dividend.
Click here to see how much profit InnoTec TSS has paid out over the past 12 months.
Have earnings and dividends increased?
Stocks with stable earnings can still be attractive dividend payers, but it’s important to be more conservative in your approach and demand a greater margin of safety when it comes to dividend sustainability. If earnings fall enough, the company could be forced to cut its dividend. With that in mind, we’re not thrilled to see that InnoTec TSS’s earnings per share have remained virtually flat for the past five years. It’s better than seeing them fall, sure, but over the long term, all the best dividend-paying stocks have the potential to significantly increase their earnings per share.
Another key way to gauge a company’s dividend outlook is to measure its historical rate of dividend growth. InnoTec TSS has recorded dividend growth of 6.5% per year on average over the past 10 years.
To sum up
Is InnoTec TSS an attractive dividend stock, or is it better left on the shelf? Earnings per share did not increase and InnoTec TSS’s earnings payout rate appears reasonable. However, he paid in an incredibly high percentage of his cash, which is concerning. It’s not an attractive combination from a dividend perspective, and we’re inclined to drop this one for now.
So, if you’re still interested in InnoTec TSS despite its low dividend qualities, you should be well-informed about some of the risks this stock faces. For example, we found 2 warning signs for InnoTec TSS (1 is not too much for us!) that deserve your attention before investing in shares.
If you are looking for good dividend payers, we recommend by consulting our selection of the best dividend-paying stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.