Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Fresenius Medical Care AG & Co. KGaA (ETR:FME) is about to go ex-dividend in just four days. Ex-dividend means that investors that purchase the stock on or after the 28th of August will not receive this dividend, which will be paid on the 1st of September.
Fresenius Medical Care KGaA’s upcoming dividend is €1.20 a share, following on from the last 12 months, when the company distributed a total of €1.20 per share to shareholders. Looking at the last 12 months of distributions, Fresenius Medical Care KGaA has a trailing yield of approximately 1.6% on its current stock price of €72.9. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. That’s why it’s good to see Fresenius Medical Care KGaA paying out a modest 27% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see Fresenius Medical Care KGaA earnings per share are up 9.0% per annum over the last five years. Management have been reinvested more than half of the company’s earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Fresenius Medical Care KGaA has lifted its dividend by approximately 7.0% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Is Fresenius Medical Care KGaA worth buying for its dividend? Earnings per share growth has been growing somewhat, and Fresenius Medical Care KGaA is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Fresenius Medical Care KGaA is halfway there. It’s a promising combination that should mark this company worthy of closer attention.
In light of that, while Fresenius Medical Care KGaA has an appealing dividend, it’s worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for Fresenius Medical Care KGaA and you should be aware of this before buying any shares.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. 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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