Stock Analysis

Know This Before Buying Reef Casino Trust (ASX:RCT) For Its Dividend

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ASX:RCT
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Is Reef Casino Trust (ASX:RCT) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

A high yield and a long history of paying dividends is an appealing combination for Reef Casino Trust. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding Reef Casino Trust for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Reef Casino Trust!

historic-dividend
ASX:RCT Historic Dividend December 7th 2020

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Reef Casino Trust pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Reef Casino Trust paid out 108% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow.

Remember, you can always get a snapshot of Reef Casino Trust'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. Reef Casino Trust has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was AU$0.2 in 2010, compared to AU$0.09 last year. The dividend has shrunk at around 9.8% a year during that period. Reef Casino Trust's dividend hasn't shrunk linearly at 9.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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. Reef Casino Trust's earnings per share have shrunk at 48% 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 Reef Casino Trust paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. 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. Using these criteria, Reef Casino Trust looks quite suboptimal from a dividend investment perspective.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 5 warning signs for Reef Casino Trust (of which 2 are concerning!) you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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