Dividend paying stocks like ZCCM Investments Holdings Plc (EPA:MLZAM) 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.
With a 2.2% yield and a five-year payment history, investors probably think ZCCM Investments Holdings looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. 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.
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 66% of ZCCM Investments Holdings’s profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while ZCCM Investments Holdings pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.
With a strong net cash balance, ZCCM Investments Holdings investors may not have much to worry about in the near term from a dividend perspective.
We update our data on ZCCM Investments 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. Looking at the data, we can see that ZCCM Investments Holdings has been paying a dividend for the past five years. During the past five-year period, the first annual payment was K1.56 in 2015, compared to K0.33 last year. This works out to a decline of approximately 79% over that time.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
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. ZCCM Investments Holdings’s earnings per share have shrunk at 30% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and ZCCM Investments Holdings’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that ZCCM Investments 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 ZCCM Investments Holdings has an acceptable payout ratio, although its dividend was not well covered by cashflow. 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. There are a few too many issues for us to get comfortable with ZCCM Investments Holdings from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
See if management have their own wealth at stake, by checking insider shareholdings in ZCCM Investments Holdings stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.
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