Last update on 2024-06-27

Covestro (1COV.DE) - Dividend Analysis (Final Score: 5/8)

Covestro (1COV.DE) Dividend Analysis - Detailed assessment of dividend policy performance and stability. Final Score: 5/8. Read in-depth insights here.

Short Analysis - Dividend Score: 5

We're running Covestro (1COV.DE) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

From the analysis, Covestro's dividend policy shows both strengths and weaknesses. Covestro had a higher-than-average dividend yield in specific years (e.g., 9.3% in 2022) but recently reported no dividend yield, a red flag for income-focused investors. While the average dividend growth rate seemed attractive (17.7%), it's highly unstable, occasionally dropping to negative growth. Positively, the payout ratio over 12 years averaged at a conservative 4.67%, but erratic coverage by earnings indicates financial instability. Dividends weren't consistently covered by cash flow in several years, highlighting cash flow issues. Overall, Covestro lacks stable dividends and has a short history of paying dividends consistently, starting only in 2016. Though share repurchase activities are ongoing and beneficial, they lack consistency, responding more to market conditions than a steady strategy.

Insights for Value Investors Seeking Stable Income

Given Covestro's inconsistent dividend practices, financial instability shown by erratic coverage of dividends, and relatively short dividend payment history, it may not be the best stock for conservative, income-focused, or long-term dividend investors. Those seeking reliable returns may want to explore alternative investments. However, for those interested in capital gains and that can tolerate risk, monitoring Covestro's cash flow and repurchase strategies might present some value-driven opportunities.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is important because it indicates the return on investment from dividends alone, providing an insight into the income-generating potential of a stock.

Covestro's current dividend yield is 0%, significantly lower than the industry average of 2.37%. Historically, Covestro's dividend yield fluctuated, showing significant highs and lows: notably, exceeding the industry average in certain years such as 2018 (5.095%), 2019 (5.7901%), and particularly in 2022 (9.3023%). This indicates that Covestro can offer competitive dividends, although the recent decline to 0% is concerning for income-focused investors.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate indicates the annualized percentage rate of growth of a company's dividend over a specified period, in this case, 20 years. It is significant because a consistent and sustained dividend growth rate above 5% can mean greater income for shareholders and reflects positively on the company's financial health and its management's confidence in earnings growth.

Based on the given Dividend Ratio data, Covestro (1COV.DE) does not show a clear 20-year history, as the complete data from 2003 is missing. Nonetheless, analyzing the provided values starting from 2012, the Dividend Growth Rate is highly variable, with significant fluctuations and even negative growth in some years: impacted by factors such as market conditions, operational performance, or changes in company policies. From 2016 to 2023, dividends per share ratio's annual growth varies, for example, 92.8571% in 2016, -100% in 2023. The Average Dividend growth is high at 17.713% over the years, signifying to some extent a good trend, but the high standard deviation and the period of no dividends portray less stability. Investors might find such inconsistent data concerning for long-term dividend growth reliability. Overall, although there were high-growth periods, the inconsistency diminishes the attractiveness concerning stable, higher-than-5% annualized increase for long-term investment.

Average annual Payout Ratio lower than 65% in the last 20 years?

The payout ratio represents the percentage of earnings paid to shareholders in the form of dividends. A payout ratio lower than 65% is generally considered sustainable as it indicates that the company retains enough earnings to fund growth opportunities and withstand economic downturns. Consistently high payout ratios could signal potential issues in sustaining dividends.

For Covestro (1COV.DE), the average payout ratio over the last 12 years stands at a remarkably low 4.67%, which is significantly below the 65% threshold. This trend suggests that Covestro has maintained a very conservative dividend policy, retaining the majority of its earnings for reinvestment or other corporate needs. Notably, there was a significant spike in the payout ratio in 2019 and 2020, reaching as high as 145.03% and 79.45%, respectively. However, the negative and zero payout ratios in other years have brought down the average. The overall low average payout ratio is a good sign, indicating that for most years, Covestro did not overextend its dividend commitments, potentially positioning itself for long-term sustainability and future growth.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings

Dividends per Share have not been consistently covered by Earnings per Share for Covestro. For instance, in the year 2013, dividends per share weren't paid out at all, nor from 2012 to 2015 reflecting a payout ratio of 0 during these years. It’s only from 2016 that both earnings and dividends metrics provided meaningful insights. In 2016, the payout ratio was approximately 17.83%, suggesting dividends were comfortably covered. Moving to 2018, we witnessed a higher, yet manageable payout ratio of approx. 23.26%. However, the alarming trends emerged during 2020 when dividend per share was higher than earnings per share resulting in an enormous -238.66% payout ratio. Again, the negative payout in 2020 and subsequent deterioration till 2023 (-104.62%) signal liquidity concerns, unsustainable payout practices, and business disruptions. Thus, there is perceived inconsistency in the extent dividends are well covered by earnings hinting at financial instability lately due to market conditions, severe economic disruptions, or changing corporate policies leading to unsustainable spendings impacting investor's returns overtime; which cumulatively calls for attention.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow means that the free cash flow of the company should be significantly higher than the dividend payouts. This is crucial because it indicates that the company generates enough cash to comfortably pay its dividends without resorting to external borrowing or diverting funds from other essential uses.

Examining Covestro's data from 2012 to 2023, a fluctuating trend can be observed in how well the dividends are covered by cash flow. Starting with extremely low coverage ratios such as 0.55% in 2012 and 0.48% in 2013, the company showed its inability to adequately cover its dividends using free cash flow. As we approach mid-decade, coverage ratios improved, reaching around 10% in 2016 and 14.87% in 2017. However, the most striking observation is the substantial increase in the dividend coverage ratio to around 26.42% in 2018 and a staggering 93.45% in 2019. The trend significantly reverses in 2020, diving to 41.70% coverage and further declining to 18.33% in 2021. The highest spike is noted in 2022 with an extraordinary coverage ratio of 473.91%, indicating a very high free cash flow compared to the dividend payout. Nonetheless, the ratio plummeted again to 1.72% in 2023. The considerable year-to-year variability in these coverage ratios indicates instability in cash flow generation or dividend policies. While exceptionally high coverage ratios show the capacity to fund dividends easily, the dramatic shifts and the lower ratios in some years highlight a lack of consistent cash flow generation outpacing dividend obligations. This trend is somewhat troubling for long-term dividend sustainability without efforts to stabilize cash flow.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

Examining Covestro's dividend per share history over the last decade where data is available, several points stand out. In 2017, the dividend per share was €1.35, rising steadily to reach €3.6 in 2020. However, in 2021, it plummeted to €1.3, a drastic 63.89% decrease from the previous year. Similar instability is evidenced in 2023, where no dividend was paid at all (even lower than the zero dividends in the early part of the decade). Clearly, Covestro does not meet the criterion of 'Stable Dividends Over the Past 20 Years.' For income-focused investors, this degree of variability and absence of payout makes Covestro's dividend history less attractive. Companies with erratic dividend policies introduce unpredictability, complicating income planning for investors reliant on dividends. This inconsistency signals potential underlying financial or operational issues within Covestro, thereby making it an unsuitable pick for investors prioritizing steady and reliable dividend income.

Dividends Paid for Over 25 Years?

Explain the criterion for Covestro (1COV.DE) and why it is important to consider

Covestro has not maintained a consistent dividend payout for the last 25 years, having started only in 2016. The dividends varied significantly, ranging from €0.7 in 2016 to €3.6 in 2020. The latest dividend for 2023 is €0, indicating a halt. Consistent dividends over long periods underscore financial stability and shareholder commitment. Covestro's dividend volatility shows fluctuating profitability and limited distribution history, raising concerns regarding long-term income reliability for investors.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable Stock Repurchases Over the Past 20 Years

Based on the provided data, Covestro has engaged in share repurchase programs in several years, specifically in 2015, 2017, 2018, 2019, 2022, and 2023. On average, there has been a decrease of approximately -0.8689 million shares per year over the last 20 years. The repurchase activity has seen substantial reductions in a diverse range of years, not limited to consecutive periods. However, there has been no consistent trend in every individual year, bringing into question the regularity but not necessarily the reliability of the repurchasing strategy. A strategically driven share repurchase program can convey management's confidence in the intrinsic value of the company's stock and aligns with shareholder interests. Observing consistently periodic buybacks might reflect financial strength and discipline, which is a positive sign for long-term investors. While Covestro has diminished its outstanding shares from 234,339,622 in 2012 to 189,262,192 in 2023, the somewhat intermittent nature of repurchases suggests a response to market conditions rather than a pre-defined systematic approach. This repurchasing trend could be favorable as it signals that the company is willing to return excess capital to shareholders when it sees shares trading below intrinsic value, despite lacking steadfast regularity. As such, this repurchasing behavior appears relatively prudent and beneficial but should be closely monitored for sustainability and impact on shareholder value over time.