The advice of Eutelsat Communications SA (EPA: ETL) announced that it will increase its dividend on November 18 to € 0.93. This will bring the dividend yield from 9.5% to 9.5%, which will give shareholders returns a big boost.

Check out our latest analysis for Eutelsat Communications

Eutelsat Communications dividend is well covered by earnings

Impressive dividend yields are good, but it doesn’t matter much if the payouts can’t be sustained. Prior to this announcement, Eutelsat Communications’ dividend exceeded its earnings, but free cash flow covered it fairly comfortably. Since dividend is an outflow of cash, we believe cash is more important than accounting measures of profit when valuing dividend, so this is a mitigating factor.

Over the next year, EPS is expected to increase by 29.1%. If recent dividend trends continue, the 12 month payout ratio could be 78% which is a bit high but can certainly be sustainable.

Dividend volatility

The company has a long history of dividends, but it doesn’t look good with the cuts of the past. The first annual payment over the past 10 years was € 0.76 in 2011, and the last payment for the year was € 0.93. This implies that the company has increased its distributions at an annual rate of approximately 2.0% over that period. It’s good to see modest dividend growth, but we believe this is offset by historic reductions in payments. It is difficult to live on dividend income if the profits of the company are not constant.

Dividend growth is questionable

Since the dividend has been reduced in the past, we need to check if profits are increasing and if this could lead to higher dividends in the future. Over the past five years, earnings per share of Eutelsat Communications have declined by approximately 9.3% per year. If the company earns less over time, it naturally follows that it will also have to pay less dividends. Profits are expected to rise over the next 12 months and if that happens we could still be a little cautious until it becomes a trend.

The dividend could prove to be unreliable

In summary, while it’s always good to see the dividend increase, we don’t think Eutelsat Communications’ payouts are strong. Payments haven’t been particularly stable and we don’t see huge growth potential, but with the dividend well covered by cash flow, it could prove to be reliable in the short term. We would be a little cautious if we were relying on this security primarily for dividend income.

It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic policy. At the same time, there are other factors that our readers should be aware of before investing any capital in a stock. For example, we have selected 3 warning signs for Eutelsat Communications that investors should be aware of before committing capital to this stock. If you are a dividend investor, you can also view our curated list of high performing dividend stocks.

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