Stock Analysis

Tread With Caution Around Abu Dhabi National Hotels Company PJSC's (ADX:ADNH) 2.9% Dividend Yield

ADX:ADNH
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Today we'll take a closer look at Abu Dhabi National Hotels Company PJSC (ADX:ADNH) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A slim 2.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Abu Dhabi National Hotels Company PJSC could have potential. Some simple research can reduce the risk of buying Abu Dhabi National Hotels Company PJSC for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

historic-dividend
ADX:ADNH Historic Dividend February 15th 2021

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. Abu Dhabi National Hotels Company PJSC paid out 43% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Abu Dhabi National Hotels Company PJSC paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

We update our data on Abu Dhabi National Hotels Company PJSC 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. For the purpose of this article, we only scrutinise the last decade of Abu Dhabi National Hotels Company PJSC'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.إ0.3 in 2011, compared to د.إ0.07 last year. Dividend payments have fallen sharply, down 72% over that time.

We struggle to make a case for buying Abu Dhabi National Hotels Company PJSC for its dividend, given that payments have shrunk over the past 10 years.

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. Over the past five years, it looks as though Abu Dhabi National Hotels Company PJSC's EPS have declined at around 7.3% a year. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

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. Abu Dhabi National Hotels Company PJSC has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Earnings per share are down, and Abu Dhabi National Hotels Company PJSC's dividend has been cut at least once in the past, which is disappointing. In summary, Abu Dhabi National Hotels Company PJSC has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas 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. To that end, Abu Dhabi National Hotels Company PJSC has 2 warning signs (and 1 which is concerning) we think you should know about.

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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