Hunting PLC (LON:HTG) Is Yielding 2.5% - But Is It A Buy?

Dividend paying stocks like Hunting PLC (LON:HTG) 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. 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 2.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Hunting has some staying power. During the year, the company also conducted a buyback equivalent to around 2.5% of its market capitalisation. 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.

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Payout ratios

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Hunting pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Hunting's cash payout ratio last year was 23%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.

With a strong net cash balance, Hunting investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Hunting'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. For the purpose of this article, we only scrutinise the last decade of Hunting'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 US$0.2 in 2011, compared to US$0.09 last year. This works out to be a decline of approximately 7.3% per year over that time. Hunting's dividend has been cut sharply at least once, so it hasn't fallen by 7.3% every year, but this is a decent approximation of the long term change.

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

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. It's good to see Hunting has been growing its earnings per share at 22% a year over the past five years.

Conclusion

To summarise, shareholders should always check that Hunting'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 not keen on the fact that Hunting paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. In sum, we find it hard to get excited about Hunting from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

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 instance, we've picked out 2 warning signs for Hunting that investors should take into consideration.

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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