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Fresenius Medical Care AG & Co. KGaA (ETR:FME) announced that it would increase its dividend on May 17 to €1.35. This brings the annual payout to 2.3% of the current share price, which is within the industry average.
See our latest analysis for Fresenius Medical Care KGaA
Fresenius Medical Care KGaA payment has strong revenue coverage
We’re not too impressed with dividend yields unless they can be sustained over time. Prior to this announcement, Fresenius Medical Care KGaA’s dividend was largely covered by both cash flow and earnings. This indicates that a large part of the profits are reinvested in the company, with the aim of fueling growth.
Looking ahead, earnings per share are expected to grow 4.7% over the next year. If the dividend continues on this path, the payout ratio could be 42% by next year, which we believe can be quite sustainable in the future.
Fresenius Medical Care KGaA has a strong track record
The company has a long history of paying stable dividends. The first annual payment in the past 10 years was €0.69 in 2012, and the last payment in the fiscal year was €1.35. This means that it increased its distributions by 6.9% per year during this period. Companies like this can be very valuable in the long run, if the decent growth rate can be maintained.
Dividend growth prospects are limited
Investors who have held shares of the company for the past few years will be pleased with the dividend income they have received. However, first appearances could be deceiving. Fresenius Medical Care KGaA has seen its earnings per share fall by 2.4% per year over the past five years. A slight decline in earnings is not great, and it is unlikely that the dividend will increase in the future unless this trend can be reversed. Earnings are expected to grow over the next year, but we will remain cautious until a track record of earnings growth is established.
Our opinion on the dividend of Fresenius Medical Care KGaA
All in all, it’s a reasonable dividend, and increasing it is an added bonus. Earnings coverage is okay at the moment, but with declining earnings, we’ll definitely be keeping an eye on the payout ratio. Given all of this, the dividend looks viable going forward, but investors should keep in mind that the company has pushed the boundaries of sustainability in the past and could do so again.
Companies with a stable dividend policy are likely to enjoy greater investor interest than those that suffer from a more inconsistent approach. Meanwhile, despite the importance of dividend payouts, these are not the only factors our readers should be aware of when evaluating a company. Pushing the debate a little further, we have identified 1 warning sign for Fresenius Medical Care KGaA that investors should be aware of going forward. Fresenius Medical Care KGaA not quite the opportunity you were looking for? Why not check out our selection of the best dividend stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.