Are Dividend Investors Getting More Than They Bargained For With R.A.K. Ceramics P.J.S.C.'s (ADX:RAKCEC) Dividend?

Dividend paying stocks like R.A.K. Ceramics P.J.S.C. (ADX:RAKCEC) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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.

In this case, R.A.K. Ceramics P.J.S.C likely looks attractive to dividend investors, given its 4.3% dividend yield and eight-year payment history. It sure looks interesting on these metrics - but there's always more to the story. Some simple research can reduce the risk of buying R.A.K. Ceramics P.J.S.C for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While R.A.K. Ceramics P.J.S.C pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Of the free cash flow it generated last year, R.A.K. Ceramics P.J.S.C paid out 34% as dividends, suggesting the dividend is affordable.

Remember, you can always get a snapshot of R.A.K. Ceramics P.J.S.C's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

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. Looking at the last decade of data, we can see that R.A.K. Ceramics P.J.S.C paid its first dividend at least eight years ago. It's good to see that R.A.K. Ceramics P.J.S.C has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was د.إ0.1 in 2013, compared to د.إ0.07 last year. This works out to be a decline of approximately 8.3% per year over that time. R.A.K. Ceramics P.J.S.C's dividend has been cut sharply at least once, so it hasn't fallen by 8.3% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. R.A.K. Ceramics P.J.S.C's EPS have fallen by approximately 16% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and R.A.K. Ceramics P.J.S.C's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In summary, R.A.K. Ceramics P.J.S.C has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for R.A.K. Ceramics P.J.S.C (1 doesn't sit too well with us!) that you should be aware of before investing.

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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