Should You Buy Al Ain Ahlia Insurance Co. P.S.C. (ADX:ALAIN) For Its Dividend?

Today we'll take a closer look at Al Ain Ahlia Insurance Co. P.S.C. (ADX:ALAIN) 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.

With Al Ain Ahlia Insurance P.S.C yielding 9.5% 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 research can reduce the risk of buying Al Ain Ahlia Insurance P.S.C for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Al Ain Ahlia Insurance P.S.C!

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. Al Ain Ahlia Insurance P.S.C paid out 71% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

Remember, you can always get a snapshot of Al Ain Ahlia Insurance P.S.C's latest financial position, by checking our visualisation of its financial health.

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 Al Ain Ahlia Insurance P.S.C's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was د.إ7.5 in 2010, compared to د.إ3.5 last year. This works out to be a decline of approximately 7.3% per year over that time. Al Ain Ahlia Insurance P.S.C's dividend has been cut sharply at least once, so it hasn't fallen by 7.3% 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. Al Ain Ahlia Insurance P.S.C has grown its earnings per share at 4.7% per annum over the past five years. 4.7% per annum is not a particularly high rate of growth, which we find curious. If the company is struggling to grow, perhaps that's why it elects to pay out more than half of its earnings to shareholders.

Conclusion

To summarise, shareholders should always check that Al Ain Ahlia Insurance P.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. Al Ain Ahlia Insurance P.S.C's payout ratio is within an average range for most market participants. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Al Ain Ahlia Insurance P.S.C might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Al Ain Ahlia Insurance P.S.C that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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