The case for buying stock in the German industrial giant is based on two pillars. First is its hefty dividend -- current yield is around 3.6%. Second is that the diversification in its mix of businesses should ensure its earnings and dividend can grow throughout the economic cycle.

Let's take a look at these factors in the context of the latest first-quarter earnings report from Siemens (OTC:SIEGY).

Dividend outlook

On the first marker, there was slightly disappointing news. Siemens plans to pay out 40% to 60% of its net income in dividends, and here the news was mixed. In this article, I will refer to Siemens' numbers in euros, but holders of the ADR will trade the stock (and receive dividends) in U.S. dollars.

A post it note with the word "dividends" written on it

Siemens pays dividends in U.S. dollars, too. Image source: Getty Images.

While the company maintained its full-year 2020 EPS guidance for 6.30 euros to 7.00 euros, implying growth of 3.7% at the midpoint from 6.41 euros in 2019, the disappointing earnings in the first quarter mean it's going to be difficult for Siemens to hit the high end of its EPS guidance range now.

Based on the midpoint of Siemens' guidance, meaning 6.65 euros, paying 60% of it would mean a dividend of 3.99 euros compared to the recent dividend of 3.9 euros -- implying a yield close to 3.7% at the current price. It's still attractive for divided-seeking investors, but Siemens doesn't need any more earnings disappointments.

Sustainable earnings?

The recent earnings report was unusual. Instead of its normal business producing lackluster results, it was the listed companies of which Siemens remains a majority shareholder, namely Siemens Healthineers (OTC:SMMNY) and Siemens Gamesa Renewable Energy (OTC:GCTAF) or SGRE, that disappointed. 

In addition, during the earnings call, CFO Ralf Thomas said he was disappointed in the gas and power segment margin of just 1.4% in the quarter due to a "a less favorable revenue mix and additional expenses for the ramp up of the stand-alone set up of Siemens Energy." As a reminder, Siemens plans to add its existing 59% stake in SGRE and another 8.1% stake in SGRE to be purchased from Iberdrola, to its gas and power, and then spin it off with Siemens retaining a minority stake.

Speaking on the earnings call, Siemens CEO Joe Kaeser said he was "looking forward to a significant improvement, in particular, in the imaging business in the second quarter" for Siemens Healthineers. SGRE lowered its full-year earnings before interest and taxes, or EBIT, margin guidance to 4.5% to 6% from a previous estimate of 5.5% to 7%, citing delays on onshore projects caused by bad weather.

Segment/Listed Company

EBITA

Growth (YOY)

EBITA Margin

Full-Year Target

Digital Industries

541 million euros

(32)%

17.4%

17%-23%

Smart Infrastructure

281 million euros

33%

8.8%

10%-15%

Gas and Power

62 million euros

(63)%

1.7%

8%-12%

Mobility

219 million euros

(7)%

10%

9%-12%

Siemens Healthineers*

492 million euros

(8)%

14.20%

17%-21%

Siemens Gamesa Renewable Energy**

(165) million euros

n/a

-7.90%

7%-11%

Data source: Siemens. *Publicly listed company of which Siemens owns 85% of shares. **Publicly listed company of which Siemens owns 59% of shares. EBITA = earnings before interest, tax, and amortization. YOY = year over year.

Earnings outlook

Digging into the details, it's noticeable that Siemens' rival, General Electric (NYSE:GE), has also seen pricing pressure in its renewable energy business, and the segment's profit margin turned negative in 2019. Similarly, GE Healthcare has also seen sluggish growth in its healthcare systems sales, notably in imaging. Both of these things suggest Siemens Healthineers and SGRE may not find it so easy to recover lost ground in 2020.

However, the outlook for Siemens' digital industries (automation and industrial software) is pretty consistent with previous expectations, with Kaeser noting that he continued to "expect the trough in our most relevant short cycle verticals not before mid calendar year 2020."

Moreover, GE has been signaling that its gas turbine end markets are showing signs of stabilization. That's good news for Siemens, but the segment needs to improve margin performance in the coming quarters.

Is Siemens a buy?

All told, Siemens is still a good-looking investment for dividend-seeking investors, but if there are any more disappointments in earnings, analysts will be scrambling to lower earnings forecasts. Siemens Healthineers and SGRE both need to improve margin performance -- not easy in a difficult market -- but there might be some upside potential in digital industries as well as gas and power in 2020 given some global economic improvement.