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Finding the right stock can be a tedious process. Just because a company pays out a nice dividend does not mean you should invest in it. By looking at a company through simple metrics allows us to see how the company stacks up.

Diebold Inc. (NYSE:DBD) is a software company that sells security solutions for self-service technology such as ATMs. Diebold has been in business since 1859 when they manufactured safes and vaults for banks.

Using Benjamin Graham's four rules for the common stock we are going to first take a glance at how well the company sits. The criteria Graham set are:

  1. There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.
  2. Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear. Observations on this point are added at the end of the chapter. (At least $50 Million in revenue and twice the assets over liabilities)
  3. Each company should have a long record of continuous dividend payments. To be specific on this point we would suggest the requirement of continuous dividend payments beginning at least in 1950. (From 1973)
  4. The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last twelve-month period.

Let's compare Diebold to these guidelines and see where we are.

  • We already know that Diebold is in the business of financial security software solutions.
  • Diebold stands at $2.93 Billion in revenue. Currently, Diebold has $2,629,523,000 in assets and $1,826,674,000 in liabilities.
  • Diebold has raised and increased their dividend for 59 years. Diebold Currently pays a $1.15 dividend or 3.7% yield.
  • Diebold current earnings sit at $0.31 a share. At a P/E of 20 we get a price point of $6.20. Earnings for the past seven years are as follows.

Year

2012

2011

2010

2009

2008

2007

2006

AVG

25 P/E

EPS

$1.28

$2.23

-$0.31

$1.09

$1.62

$1.47

$1.62

$1.29

$32.25

Restructuring

Diebold is on the tail end of a restructuring process. The latest earnings report reflects this as they posted a loss of $13.4 Million. Diebold removed 700 jobs in an attempt to lower costs and plans to sell some of its assets.

Management forecasts that the company should stabilize by 2015 after it has completed its overhaul and lowered or eliminated unnecessary costs.

Conclusions

Chasing a yield is the last thing an investor wants to do. If you do find a company with a solid yield; make sure the company is able to sustain that yield. Even though Diebold has paid a healthy dividend and increased it for the past 59 years does not mean it will be able to continue to do so.

Currently, Diebold's revenue is not enough to sustain its yield. Hopefully the restructuring will be enough to raise revenue in order to continue the dividend payout and stabilize the company. Diebold is in a changing and shrinking sector as more people are moving away from brick and mortar banking and going online.

The company is currently valued based on the dividend and as if the restructuring is not happening. Caution is advised; if the dividend is not increased in the future or if it is reduced, the price may follow.

Source: This Dividend Aristocrat Needs To Be Cautious Moving Forward