ABC arbitrage SA (EPA:ABCA) Vies For A Place In Your Dividend Portfolio: Here's Why

Dividend paying stocks like ABC arbitrage SA (EPA:ABCA) 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. 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 ABC arbitrage yielding 5.4% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. 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 ABC arbitrage!

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. In the last year, ABC arbitrage paid out 21% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

Consider getting our latest analysis on ABC arbitrage's 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. For the purpose of this article, we only scrutinise the last decade of ABC arbitrage's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was €0.8 in 2010, compared to €0.4 last year. The dividend has shrunk at around 6.1% a year during that period. ABC arbitrage's dividend has been cut sharply at least once, so it hasn't fallen by 6.1% every year, but this is a decent approximation of the long term change.

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

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see ABC arbitrage has grown its earnings per share at 12% per annum over the past five years. Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Conclusion

To summarise, shareholders should always check that ABC arbitrage's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see ABC arbitrage has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. ABC arbitrage has a number of positive attributes, but falls short of our ideal dividend company. It may be worth a look at the right price, though.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 2 warning signs for ABC arbitrage (1 is potentially serious!) that you should be aware of before investing.

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