How Does Abu Dhabi National Oil Company for Distribution PJSC (ADX:ADNOCDIST) Fare As A Dividend Stock?

Could Abu Dhabi National Oil Company for Distribution PJSC (ADX:ADNOCDIST) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.

Abu Dhabi National Oil Company for Distribution PJSC yields a solid 4.8%, although it has only been paying for three years. A 4.8% yield does look good. Could the short payment history hint at future dividend growth? When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Abu Dhabi National Oil Company for Distribution PJSC!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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 Oil Company for Distribution PJSC paid out 106% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Abu Dhabi National Oil Company for Distribution PJSC paid out 324% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Cash is slightly more important than profit from a dividend perspective, but given Abu Dhabi National Oil Company for Distribution PJSC's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

We update our data on Abu Dhabi National Oil Company for Distribution 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. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past three-year period, the first annual payment was د.إ0.06 in 2018, compared to د.إ0.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 52% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

Abu Dhabi National Oil Company for Distribution PJSC has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

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? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Abu Dhabi National Oil Company for Distribution PJSC has grown its earnings per share at 13% per annum over the past five years. While EPS are growing rapidly, Abu Dhabi National Oil Company for Distribution PJSC paid out a very high 106% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

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 Abu Dhabi National Oil Company for Distribution PJSC paying out a high percentage of both its cashflow and earnings. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. In summary, Abu Dhabi National Oil Company for Distribution PJSC has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 3 warning signs for Abu Dhabi National Oil Company for Distribution PJSC (of which 2 are a bit unpleasant!) 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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