Could Clinigen Group plc (LON:CLIN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
Investors might not know much about Clinigen Group’s dividend prospects, even though it has been paying dividends for the last eight years and offers a 1.0% yield. A 1.0% yield is not inspiring, but the longer payment history has some appeal. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. Looking at the data, we can see that 65% of Clinigen Group’s profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Clinigen Group paid out 64% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It’s positive to see that Clinigen Group’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.
Consider getting our latest analysis on Clinigen Group’s financial position here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for Clinigen Group, in the last decade, was eight years ago. The dividend has been quite stable over the past eight years, which is great to see – although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past eight-year period, the first annual payment was UK£0.01 in 2012, compared to UK£0.07 last year. This works out to be a compound annual growth rate (CAGR) of approximately 24% a year over that time.
The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Clinigen Group’s earnings per share have shrunk at 12% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Clinigen Group’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Clinigen Group’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 think Clinigen Group is paying out an acceptable percentage of its cashflow and profit. Second, earnings per share have been in decline, and the dividend history is shorter than we’d like. Overall, Clinigen Group falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Just as an example, we’ve come accross 4 warning signs for Clinigen Group you should be aware of, and 1 of them is concerning.
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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