Is Gowing Bros. Limited (ASX:GOW) A Risky Dividend Stock?

Dividend paying stocks like Gowing Bros. Limited (ASX:GOW) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

In this case, Gowing Bros likely looks attractive to investors, given its 3.0% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Gowing Bros for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Gowing Bros!

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. Looking at the data, we can see that 91% of Gowing Bros' profits were paid out as dividends in the last 12 months. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

Consider getting our latest analysis on Gowing Bros' financial position here.

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. Gowing Bros 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$0.09 in 2011, compared to AU$0.06 last year. The dividend has shrunk at around 4.1% a year during that period. Gowing Bros' dividend has been cut sharply at least once, so it hasn't fallen by 4.1% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Gowing Bros for its dividend, given that payments have shrunk over the past 10 years.

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. Over the past five years, it looks as though Gowing Bros' EPS have declined at around 24% a year. 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

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, it's not great to see how much of its earnings are being paid as dividends. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In short, we're not keen on Gowing Bros from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come accross 5 warning signs for Gowing Bros you should be aware of, and 2 of them are potentially serious.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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