Is Amanat Holdings PJSC's (DFM:AMANAT) 2.7% Dividend Sustainable?

Dividend paying stocks like Amanat Holdings PJSC (DFM:AMANAT) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

With a 2.7% yield and a five-year payment history, investors probably think Amanat Holdings PJSC looks like a reliable dividend stock. A 2.7% yield is not inspiring, but the longer payment history has some appeal. There are a few simple ways to reduce the risks of buying Amanat Holdings PJSC for its dividend, and we'll go through these below.

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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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Amanat Holdings PJSC paid out 667% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Consider getting our latest analysis on Amanat Holdings PJSC'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. Looking at the data, we can see that Amanat Holdings PJSC has been paying a dividend for the past five years. During the past five-year period, the first annual payment was د.إ0.01 in 2016, compared to د.إ0.02 last year. Dividends per share have grown at approximately 8.0% per year over this time. The dividends haven't grown at precisely 8.0% every year, but this is a useful way to average out the historical rate of growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Amanat Holdings PJSC's earnings per share have shrunk at 29% 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 Amanat Holdings PJSC'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 its high payout ratio. Earnings per share are down, and Amanat Holdings PJSC's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Amanat Holdings PJSC looks suboptimal from a dividend investment perspective.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 1 warning sign for Amanat Holdings PJSC that investors should know about before committing capital to this stock.

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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