Fresenius Medical Care AG (ETR:FME) will increase its dividend from last year's comparable payment on the 27th of May to €1.44. This takes the annual payment to 3.1% of the current stock price, which is about average for the industry.

See our latest analysis for Fresenius Medical Care

Fresenius Medical Care's Payment Could Potentially Have Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Before this announcement, Fresenius Medical Care was paying out 79% of earnings, but a comparatively small 25% of free cash flows. This leaves plenty of cash for reinvestment into the business.

The next year is set to see EPS grow by 134.5%. If the dividend continues along recent trends, we estimate the payout ratio will be 35%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Fresenius Medical Care Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2015, the dividend has gone from €0.78 total annually to €1.44. This implies that the company grew its distributions at a yearly rate of about 6.3% over that duration. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

The Dividend Has Limited Growth Potential

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though Fresenius Medical Care's EPS has declined at around 14% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Given that earnings are not growing, the dividend does not look nearly so attractive. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 18 analysts we track are forecasting for the future. Is Fresenius Medical Care not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.