Dividend paying stocks like Genworth Mortgage Insurance Australia Limited (ASX:GMA) tend to be popular with investors, and for good reason – some research shows that a significant amount of all stock market returns come from reinvested dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, Genworth Mortgage Insurance Australia likely looks attractive to dividend investors, given its 8.7% dividend yield and five-year payment history. The yield does look pretty interesting. It also bought back stock during the year, equivalent to approximately 14% of the company’s market capitalisation at the time. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.Explore this interactive chart for our latest analysis on Genworth Mortgage Insurance Australia!
Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Genworth Mortgage Insurance Australia paid out 103% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
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. Genworth Mortgage Insurance Australia has been paying a dividend for the past five years. During the past five-year period, the first annual payment was AU$0.049 in 2014, compared to AU$0.21 last year. Dividends per share have grown at approximately 34% per year over this time. The dividends haven’t grown at precisely 34% every year, but this is a useful way to average out the historical rate of growth.
It’s not great to see that the payment has been cut in the past. We’re generally more wary of companies that have cut their dividend before, as they tend to perform worse in a downturn.
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? It’s not great to see that Genworth Mortgage Insurance Australia’s have fallen at approximately -26% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
To summarise, shareholders should always check that Genworth Mortgage Insurance Australia’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, it’s not great to see how much of its earnings are being paid as dividends. 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 Genworth Mortgage Insurance Australia from a dividend perspective. Businesses can change, but we’ve spotted a few too many concerns with this one to get comfortable.
Given that earnings are not growing, the dividend does not look nearly so attractive. See if the 3 analysts are forecasting a turnaround in our free collection of analyst estimates here.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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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.