United Internet AG (ETR:UTDI) stock is about to trade ex-dividend in three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, United Internet investors that purchase the stock on or after the 20th of May will not receive the dividend, which will be paid on the 24th of May.
The company’s next dividend payment will be €0.50 per share, on the back of last year when the company paid a total of €0.50 to shareholders. Based on the last year’s worth of payments, United Internet has a trailing yield of 1.6% on the current stock price of €31.36. If you buy this business for its dividend, you should have an idea of whether United Internet’s dividend is reliable and sustainable. So we need to investigate whether United Internet can afford its dividend, and if the dividend could grow.
Check out our latest analysis for United Internet
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. United Internet is paying out just 24% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Luckily it paid out just 18% of its free cash flow last year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we’re glad to see United Internet’s earnings per share have risen 19% per annum over the last five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, United Internet has lifted its dividend by approximately 5.2% a year on average. Earnings per share have been growing much quicker than dividends, potentially because United Internet is keeping back more of its profits to grow the business.
From a dividend perspective, should investors buy or avoid United Internet? It’s great that United Internet is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It’s disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There’s a lot to like about United Internet, and we would prioritise taking a closer look at it.
While it’s tempting to invest in United Internet for the dividends alone, you should always be mindful of the risks involved. For example, we’ve found 1 warning sign for United Internet that we recommend you consider before investing in the business.
If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.