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Is GUD Holdings Limited (ASX:GUD) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With GUD Holdings yielding 4.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It’s likely that plenty of investors have purchased it for the income. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.Click the interactive chart for our full dividend analysis
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 be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. GUD Holdings paid out 85% of its profit as dividends, over the trailing twelve month period. It’s paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. GUD Holdings paid out 110% of its free cash last year. Cash flows can be lumpy, but paying out this much cash is not ideal.
We update our data on GUD Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.
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 GUD Holdings’s dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was AU$0.60 in 2009, compared to AU$0.53 last year. This works out to be a decline of approximately -1.2% per year over that time. GUD Holdings’s dividend hasn’t shrunk linearly at -1.2% per annum, but the CAGR is a useful estimate of the historical rate of change.
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. Earnings have grown at around 7.2% a year for the past five years, which is better than seeing them shrink! Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we’d generally expect the higher payout ratio to limit its future growth prospects.
To summarise, shareholders should always check that GUD Holdings’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think GUD Holdings has an acceptable payout ratio, although its dividend was not well covered by cashflow. Second, earnings growth has been ordinary, and its history of dividend payments is chequered – having cut its dividend at least once in the past. Overall, GUD Holdings falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 7 analysts we track are forecasting for GUD Holdings for free with public analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.