Fresenius SE & Co. KGaA (ETR:FRE) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is one business day 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Fresenius SE KGaA's shares before the 18th of May in order to be eligible for the dividend, which will be paid on the 22nd of May.
The company's next dividend payment will be €0.92 per share, on the back of last year when the company paid a total of €0.92 to shareholders. Calculating the last year's worth of payments shows that Fresenius SE KGaA has a trailing yield of 3.3% on the current share price of €27.65. 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 usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Fresenius SE KGaA's payout ratio is modest, at just 38% of profit. A useful secondary check can be to evaluate whether Fresenius SE KGaA generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 38% of the free cash flow it generated, which is a comfortable payout ratio.
It's positive to see that Fresenius SE KGaA's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Fresenius SE KGaA's earnings per share have dropped 6.7% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Fresenius SE KGaA has increased its dividend at approximately 11% a year on average.
To Sum It Up
Is Fresenius SE KGaA an attractive dividend stock, or better left on the shelf? Fresenius SE KGaA has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
In light of that, while Fresenius SE KGaA has an appealing dividend, it's worth knowing the risks involved with this stock. We've identified 2 warning signs with Fresenius SE KGaA (at least 1 which can't be ignored), and understanding them should be part of your investment process.
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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.
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