Yahoo Finance Investors In Société de la Tour Eiffel (EPA:EIFF) Should Consider This, First
Dividend paying stocks like Société de la Tour Eiffel (EPA:EIFF) 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.
With Société de la Tour Eiffel yielding 7.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. 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.
Explore this interactive chart for our latest analysis on Société de la Tour Eiffel!
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. While Société de la Tour Eiffel pays a dividend, it reported a loss over the last year. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Last year, Société de la Tour Eiffel paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
REITs like Société de la Tour Eiffel often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Is Société de la Tour Eiffel's Balance Sheet Risky?
As Société de la Tour Eiffel's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. Société de la Tour Eiffel has net debt of 16.86 times its EBITDA, which we think carries substantial risk if earnings aren't sustainable.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 1.02 times its interest expense, Société de la Tour Eiffel's interest cover is starting to look a bit thin. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company's dividend while these metrics persist. That said, Société de la Tour Eiffel is in the real estate business, which is typically able to sustain much higher levels of debt, relative to other industries.
Remember, you can always get a snapshot of Société de la Tour Eiffel's latest financial position, by checking our visualisation of its financial health.
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. Société de la Tour Eiffel has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was €5.00 in 2009, compared to €3.00 last year. This works out to be a decline of approximately 5.0% per year over that time. Société de la Tour Eiffel's dividend hasn't shrunk linearly at 5.0% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Société de la Tour Eiffel 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. Over the past five years, it looks as though Société de la Tour Eiffel's EPS have declined at around 17% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
We'd also point out that Société de la Tour Eiffel issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Earnings per share are down, and Société de la Tour Eiffel's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Société de la Tour Eiffel looks quite suboptimal from a dividend investment perspective.
Are management backing themselves to deliver performance? Check their shareholdings in Société de la Tour Eiffel in our latest insider ownership analysis.
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.
