Today we’ll take a closer look at Gama Aviation Plc (LON:GMAA) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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, Gama Aviation likely looks attractive to dividend investors, given its 3.0% dividend yield and four-year payment history. It sure looks interesting on these metrics – but there’s always more to the story . When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Gama Aviation paid out 20% of its profit as dividends, over the trailing twelve month period. We’d say its dividends are thoroughly covered by earnings.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, Gama Aviation paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
We update our data on Gama Aviation every 24 hours, so you can always get our latest analysis of its financial health, here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Gama Aviation has been paying a dividend for the past four years. This company’s dividend has been unstable, and with a relatively short history, we think it’s a little soon to draw strong conclusions about its long term dividend potential. During the past four-year period, the first annual payment was US$0.03 in 2016, compared to US$0.024 last year. This works out to be a decline of approximately 5.4% per year over that time. Gama Aviation’s dividend hasn’t shrunk linearly at 5.4% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Gama Aviation for its dividend, given that payments have shrunk over the past four 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. Gama Aviation’s earnings per share have shrunk at 16% a year over the past three years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Gama Aviation’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Gama Aviation’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Gama Aviation has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, Gama Aviation has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Now, if you want to look closer, it would be worth checking out our free research on Gama Aviation management tenure, salary, and performance.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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