Is MTU Aero Engines AG (ETR: MTX) an attractive dividend-paying stock?
Dividend-paying stocks like MTU Aero Engines AG (ETR: MTX) tend to be popular with investors, and for good reason – some research suggests that a significant portion of all stock returns comes from reinvested dividends. Yet sometimes investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend falls short of expectations.
While MTU Aero Engines’ 0.6% dividend yield isn’t the highest, we think its long payout history is quite interesting. A simple analysis can reduce the risk of owning MTU Aero Engines for its dividend, and we will focus on the most important aspects below.
Explore this interactive chart for our latest analysis on MTU Aero Engines!
Dividends are generally paid out of the company’s profits. If a business pays more than it earns, then the dividend can become unsustainable – hardly an ideal situation. We must therefore ask ourselves whether a company’s dividend is sustainable, relative to its after-tax net profit. MTU Aero Engines has paid 48% of its profits in the form of dividends over the past twelve months. This is a medium range that strikes a good balance between paying dividends to shareholders and keeping enough earnings to invest in future growth. One of the risks is that management will poorly reinvest retained capital instead of paying a higher dividend.
We also measure dividends paid against a company’s leveraged free cash flow, to see if enough cash has been generated to cover the dividend. MTU Aero Engines’ cash payout ratio last year was 5.4%. Cash flow is usually erratic, but it feels like a careful payment. 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.
Be sure to get our latest analysis on MTU Aero Engines’ financial condition here.
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 MTU Aero Engines dividend payouts. The dividend has been reduced on at least one occasion in the past. Over the past 10 years, the first annual payment amounted to € 1.1 in 2011, compared to € 1.3 last year. This works out to a compound annual growth rate (CAGR) of about 1.3% per year during that time. Dividend growth has not been linear, but the CAGR is a good approximation of the rate of change over this period.
It’s good to see some dividend growth, but the dividend has been reduced at least once, and the size of the reduction would eliminate most of the growth, anyway. We are not very excited about it.
Potential for dividend growth
With a relatively volatile dividend, it’s even more important to see if earnings per share (EPS) go up. Why take the risk of seeing a dividend cut, unless there is a good chance of larger dividends in the future? Over the past five years, earnings per share of MTU Aero Engines have declined by approximately 9.2% per year. A modest drop in earnings per share isn’t great to see, but it doesn’t automatically make a dividend unsustainable. Nonetheless, we would much prefer to see EPS growth when looking for dividend paying stocks.
When we look at a dividend-paying stock, we need to make a judgment as to whether the dividend will increase, whether the company is able to sustain it under a wide range of economic circumstances, and whether the dividend payment is sustainable. It’s great to see that MTU Aero Engines pays a small percentage of its profits and cash flow. Earnings per share are down and MTU Aero Engines dividend has been reduced at least once in the past, which is disappointing. In summary, we find it hard to get excited about MTU Aero Engines from a dividend standpoint. It’s not that we think it’s a bad deal; just that there are other companies that perform better on these criteria.
Market movements attest to the high value of a coherent dividend policy compared to a more unpredictable policy. However, there are other things for investors to consider when analyzing the performance of stocks. For example, we have chosen 3 warning signs for MTU Aero engines that investors should consider.
We’ve also compiled a list of global stocks with a market cap of over $ 1 billion and a return of over 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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