Are Dividend Investors Making A Mistake With Nexans S.A. (EPA:NEX)?

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Is Nexans S.A. (EPA:NEX) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.

While Nexans’s 1.0% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple analysis can reduce the risk of holding Nexans for its dividend, and we’ll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Nexans!

ENXTPA:NEX Historical Dividend Yield, August 20th 2019

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Nexans pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Last year, Nexans paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

Is Nexans’s Balance Sheet Risky?

Given Nexans is paying a dividend but reported a loss over the past year, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Nexans has net debt of 1.77 times its EBITDA, which we think is not too troublesome.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 4.52 times its interest expense, Nexans’s interest cover is starting to look a bit thin.

Remember, you can always get a snapshot of Nexans’s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Nexans’s dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was €2.00 in 2009, compared to €0.30 last year. Dividend payments have fallen sharply, down 85% over that time.

We struggle to make a case for buying Nexans for its dividend, given that payments have shrunk over the past ten years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It’s good to see Nexans has been growing its earnings per share at 45% a year over the past 5 years.

We’d also point out that Nexans issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

To summarise, shareholders should always check that Nexans’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re a bit uncomfortable with Nexans paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Second, earnings per share have been essentially flat, and its history of dividend payments is chequered – having cut its dividend at least once in the past. In summary, Nexans has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 10 Nexans analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.