Should You Buy Al Wathba National Insurance Company PJSC (ADX:AWNIC) For Its 2.3% Dividend?

Dividend paying stocks like Al Wathba National Insurance Company PJSC (ADX:AWNIC) 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 stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

While Al Wathba National Insurance Company PJSC's 2.3% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Remember that the recent share price drop will make Al Wathba National Insurance Company PJSC's yield look higher, even though recent events might have impacted the company's prospects. There are a few simple ways to reduce the risks of buying Al Wathba National Insurance Company 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Al Wathba National Insurance Company PJSC pays a dividend, it was loss-making during the past year. When a financial business is loss-making and pays a dividend, the dividend is not covered by profits. Its important that investors assess the quality of the company's assets and whether it can return to generating a positive income.

We update our data on Al Wathba National Insurance Company PJSC every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Al Wathba National Insurance Company PJSC's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was د.إ0.06 in 2011, compared to د.إ0.1 last year. Dividends per share have grown at approximately 10.0% per year over this time. The dividends haven't grown at precisely 10.0% 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

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. Al Wathba National Insurance Company PJSC's earnings per share have shrunk at 29% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

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. We're a bit uncomfortable with it paying a dividend while reporting a loss over the past year. 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 short, we're not keen on Al Wathba National Insurance Company PJSC from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.

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. For example, we've identified 3 warning signs for Al Wathba National Insurance Company PJSC (2 don't sit too well with us!) that you should be aware of before investing.

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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