Identifying quality Swiss stocks and promoting them (4/6)

CRITERION 4: THE DIVIDEND

The dividend criterion has three variables:

• Current dividend
• Dividend growth
• Payout ratio (dividend coverage).

Ideally, you would need a dividend of at least 2 to 2.5% to get off to a good start. But things are not that simple: I have several great stocks in my portfolio with a dividend of 1 or 1.5% (e.g. IVF Hartmann or Lindt) that I wouldn't give up for anything in the world!

If you are investing for the long term, a dividend of 2 or 3% that increases each year is preferable to a dividend of 4% that remains fixed. A good history of increasing dividends is an undeniable plus, even if at this level it is impossible to be as demanding with Swiss companies as with those in Uncle Sam's country.

Dividends that are never cut and have been increasing for several decades prove that the company is making more and more money, that it knows how to control its costs, that it has confidence in its future profit prospects and that it values its shareholders. For example, Nestlé, Roche and Novartis have increased their dividends year after year since at least 1996. Roche and Nestlé have also never given up paying dividends for almost a century! What a message to shareholders!

Ideally, the dividend has grown on average by at least 5% per year over the last 10 years and this increase should be supported by an increase in profits and not by an increase in the payout ratio.

The payout ratio is the distribution ratio and is calculated as follows: the dividend divided by the earnings per share. A payout ratio lower than around 65% is preferable, but here again one should not be too intransigent at the risk of missing out on real gems (e.g. Burkhalter or Inficon).

Dividends allow us to regularly receive cash (= an income) without having to sell our shares. They help us to be patient during bearish phases of the market. They are much more stable and predictable than the evolution of the share price or profits. Dividends cannot be manipulated as easily as other figures, "they do not lie" as Geraldine Weiss wrote.

Now let's compare the dividend (blue curve) versus the earnings per share (red curve) for our two companies:

At EMS Chemie, we observe a high, predictable and Everest-like upward (ordinary) dividend. It has doubled in 6 years!!! The company does not draw on its reserves, since the dividend evolves more or less in parallel with the earnings per share.

NB: For the sake of simplification, I have only used the ordinary dividend paid by EMS Chemie (without complicating the equation with the extraordinary dividend paid very generously by EMS Chemie).

Once again, a pitiful roller coaster ride at Schaffner, it makes me seasick! Both the dividend and the earnings per share are going in all directions. The company royally mocks its shareholders by changing its dividend distribution policy as often as socks... The dividend was completely eliminated in 2017 (for the 2016 financial year), which is not surprising at all when you see for example that it had already been reduced in 2012.

Comparing the degree of dividend coverage at our two companies provides a good overview of the stability and predictability of EMS Chemie compared to the chaos at Schaffner: