Something To Consider Before Buying Carasso Motors Ltd. (TLV:CRSO) For The 5.9% Dividend

Could Carasso Motors Ltd. (TLV:CRSO) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

In this case, Carasso Motors likely looks attractive to investors, given its 5.9% 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 Carasso Motors for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. In the last year, Carasso Motors paid out 2.2% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Carasso Motors 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 Carasso Motors every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Carasso Motors has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was ₪1.5 in 2011, compared to ₪0.9 last year. The dividend has shrunk at around 5.1% a year during that period. Carasso Motors' dividend has been cut sharply at least once, so it hasn't fallen by 5.1% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Carasso Motors 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. Over the past five years, it looks as though Carasso Motors' EPS have declined at around 11% 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.

We'd also point out that Carasso Motors issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Carasso Motors has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Earnings per share are down, and Carasso Motors' dividend has been cut at least once in the past, which is disappointing. In summary, Carasso Motors 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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 4 warning signs for Carasso Motors (of which 2 are a bit unpleasant!) you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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