Is The National Bank of Ras Al-Khaimah (P.S.C.) (ADX:RAKBANK) A Good Dividend Stock?

Is The National Bank of Ras Al-Khaimah (P.S.C.) (ADX:RAKBANK) 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 National Bank of Ras Al-Khaimah (P.S.C.) yielding 7.6% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding National Bank of Ras Al-Khaimah (P.S.C.) for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on National Bank of Ras Al-Khaimah (P.S.C.)!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 73% of National Bank of Ras Al-Khaimah (P.S.C.)'s profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Consider getting our latest analysis on National Bank of Ras Al-Khaimah (P.S.C.)'s financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of National Bank of Ras Al-Khaimah (P.S.C.)'s dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was د.إ0.06 in 2011, compared to د.إ0.3 last year. Dividends per share have grown at approximately 18% per year over this time. National Bank of Ras Al-Khaimah (P.S.C.)'s dividend payments have fluctuated, so it hasn't grown 18% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. National Bank of Ras Al-Khaimah (P.S.C.)'s earnings per share have shrunk at 14% 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 National Bank of Ras Al-Khaimah (P.S.C.)'s earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think National Bank of Ras Al-Khaimah (P.S.C.) has an acceptable payout ratio. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. With this information in mind, we think National Bank of Ras Al-Khaimah (P.S.C.) may not be an ideal dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for National Bank of Ras Al-Khaimah (P.S.C.) that investors should take into consideration.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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