The dividend of Faes Farma (BME: FAE) will be increased to € 0.17

Faes Farma, SA (BME: FAE) will increase its dividend on December 23 to € 0.17. This brings the dividend yield to 5.9%, which shareholders will be delighted with.

Check out our latest review for Faes Farma

Faes Farma payment has strong income coverage

We like to see robust dividend yields, but it doesn’t matter if the payout isn’t sustainable. At the time of the last dividend payment, Faes Farma was paying a very large portion of what she earned and 732% of the cash flow. Paying such a high proportion of cash flow can expose the business to the need to reduce the dividend if the business is in difficulty.

Over the next year, EPS is expected to drop 1.8%. Assuming the dividend continues according to recent trends, we think the payout ratio could reach 92% which is definitely higher.

Historic BME dividend: FAE November 30, 2021

Dividend volatility

The company has a long history of dividends, but it doesn’t look good with the cuts of the past. Since 2011, the first annual payment was € 0.069, compared to the last annual payment of € 0.20. This works out to a compound annual growth rate (CAGR) of around 11% per year over that time period. Faes Farma has increased its distributions at a rapid pace despite the dividend reduction at least once in the past. Companies that cut once often cut again, so we would be cautious about buying these stocks just for dividend income.

Dividend growth can be hard to achieve

With a relatively volatile dividend, it is even more important to assess whether earnings per share are increasing, which could indicate an increase in the dividend in the future. There are exceptions, but limited earnings growth and a high payout ratio can indicate that a business has reached maturity. When a company prefers to pay cash to its shareholders instead of reinvesting it, that can often say a lot about that company’s dividend prospects.

In summary

Overall, we still like to see the dividend go up, but we don’t think Faes Farma will be a good income stock. While the low payout rate is a redemption feature, this is offset by the minimum amount of money to cover the payouts. We would probably look elsewhere for an income investment.

Companies with a stable dividend policy are likely to benefit from greater investor interest than those with a more inconsistent approach. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a business. As an example, we have identified 2 warning signs for Faes Farma that you need to know before you invest. If you are a dividend investor, you can also view our curated list of high performing dividend stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in any of the stocks mentioned.

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