Instituto Hermes Pardini S.A. (BVMF:PARD3) Vies For A Place In Your Dividend Portfolio: Here's Why

Is Instituto Hermes Pardini S.A. (BVMF:PARD3) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With only a three-year payment history, and a 0.9% yield, investors probably think Instituto Hermes Pardini is not much of a dividend stock. A low dividend might not be a bad thing, if the company is reinvesting heavily and growing its sales and profits. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on Instituto Hermes Pardini!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Instituto Hermes Pardini paid out 2.5% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Of the free cash flow it generated last year, Instituto Hermes Pardini paid out 33% as dividends, suggesting the dividend is affordable. It's positive to see that Instituto Hermes Pardini's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Remember, you can always get a snapshot of Instituto Hermes Pardini's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past three-year period, the first annual payment was R$0.75 in 2017, compared to R$0.21 last year. Dividend payments have fallen sharply, down 72% over that time.

We struggle to make a case for buying Instituto Hermes Pardini for its dividend, given that payments have shrunk over the past three years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Instituto Hermes Pardini has grown its earnings per share at 10.0% per annum over the past five years. A low payout ratio and strong historical earnings growth suggests Instituto Hermes Pardini has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.

Conclusion

To summarise, shareholders should always check that Instituto Hermes Pardini's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Instituto Hermes Pardini performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Instituto Hermes Pardini that investors should know about before committing capital to this stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. 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.
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