Dubai Refreshment (P.J.S.C.) (DFM:DRC) Investors Should Think About This Before Buying It For Its Dividend

Dividend paying stocks like Dubai Refreshment (P.J.S.C.) (DFM:DRC) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With Dubai Refreshment (P.J.S.C.) yielding 6.8% 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 offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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. 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. Dubai Refreshment (P.J.S.C.) paid out 123% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Dubai Refreshment (P.J.S.C.) paid out 59% 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 good to see that while Dubai Refreshment (P.J.S.C.)'s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note Dubai Refreshment (P.J.S.C.)'s strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Dubai Refreshment (P.J.S.C.) every 24 hours, so you can always get our latest analysis of its financial health, here.

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. Dubai Refreshment (P.J.S.C.) has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was د.إ0.2 in 2010, compared to د.إ0.7 last year. Dividends per share have grown at approximately 15% per year over this time. The dividends haven't grown at precisely 15% every year, but this is a useful way to average out the historical rate of growth.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Dubai Refreshment (P.J.S.C.)'s EPS have fallen by approximately 18% 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 Dubai Refreshment (P.J.S.C.)'s earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Dubai Refreshment (P.J.S.C.)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that Dubai Refreshment (P.J.S.C.) paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In this analysis, Dubai Refreshment (P.J.S.C.) doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Dubai Refreshment (P.J.S.C.) has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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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