Could Barry Callebaut AG (VTX: BARN) be an attractive dividend share to hold for the long term? Investors are often drawn to strong companies with the idea of ​​reinvesting dividends. Unfortunately, it’s common for investors to be drawn to the seemingly attractive yield and lose money when the company has to cut dividend payments.

A 1.0% return is nothing to write home about, but investors probably think the long payout history suggests Barry Callebaut has some resistance. A few simple research can reduce the risk of buying Barry Callebaut for his dividend – read on to find out more.

Explore this interactive graph for our latest analysis on Barry Callebaut!

Payout ratios

Companies (usually) pay dividends on their profits. If a company pays more than it earns, the dividend may need to be reduced. Comparing dividend payments to a company’s after-tax net income is an easy way to test real-life whether a dividend is sustainable. Last year Barry Callebaut paid 38% of his profits in the form of dividends. An average payout ratio strikes a good balance between paying dividends and retaining enough to invest in the business. One of the risks is that management will poorly reinvest retained capital instead of paying a higher dividend.

In addition to comparing dividends to earnings, we need to check whether the company has generated enough cash to pay its dividend. Of the free cash flow he generated last year, Barry Callebaut paid out 46% in dividends, suggesting the dividend is affordable. It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t fall precipitously.

We update our data on Barry Callebaut every 24 hours, so you can always get our latest analysis of his financial health, here.

Dividend volatility

From the perspective of an income investor who wants to earn dividends for many years, there is no point in buying a stock if its dividend is regularly reduced or unreliable. For the purposes of this article, we’re only looking at the last decade of Barry Callebaut’s dividend payments. The dividend has been stable for 10 years, which is great. We think this might suggest some resilience for the company and its dividends. Over the past 10 years, the first annual payment amounted to CHF 14.0 in 2011, compared to CHF 22.0 last year. This works out to a compound annual growth rate (CAGR) of about 4.6% per year during that time.

While the regularity of dividend payments is impressive, we think the relatively slow rate of growth is unattractive.

Potential for dividend growth

Dividend payouts have been constant over the past few years, but we still need to check to see if earnings per share (EPS) are increasing, as this will help maintain the purchasing power of the dividend. Profits have grown by around 5.9% per year over the past five years, which is better than seeing them decrease! Earnings per share have grown at a credible rate. In addition, the payout ratio is reasonable and offers some protection to the dividend, even the possibility of increasing it.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a history of consistent payments, and c) if the dividend is capable of growing. First, we like the fact that Barry Callebaut has low and conservative payout ratios. Growth in earnings per share has been slow, but we respect a company that maintains a relatively stable dividend. Barry Callebaut performs very well on this analysis, albeit slightly below our rigorous standards. At the right valuation, this could be a solid dividend prospect.

Market movements attest to the high value of a coherent dividend policy compared to a more unpredictable policy. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a business. For example, we have chosen 1 warning sign for Barry Callebaut that investors should consider.

If you’re a dividend investor, you might also want to check out our curated list of dividend-paying stocks that have a yield above 3%.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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