Are Dividend Investors Making A Mistake With Wonderla Holidays Limited (NSE:WONDERLA)?

Could Wonderla Holidays Limited (NSE:WONDERLA) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Investors might not know much about Wonderla Holidays's dividend prospects, even though it has been paying dividends for the last six years and offers a 1.0% yield. 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. Remember though, due to the recent spike in its share price, Wonderla Holidays's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple research can reduce the risk of buying Wonderla Holidays for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Wonderla Holidays!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Wonderla Holidays paid out 124% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, Wonderla Holidays paid out 39% as dividends, suggesting the dividend is affordable. It's good to see that while Wonderla Holidays' dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note Wonderla Holidays' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Wonderla Holidays' financial position here.

Dividend Volatility

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 Wonderla Holidays has been paying a dividend for the past six years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past six-year period, the first annual payment was ₹1.5 in 2014, compared to ₹1.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.1% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Wonderla Holidays' earnings per share have shrunk at 31% a year over the past five years. 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.

Conclusion

To summarise, shareholders should always check that Wonderla Holidays' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Earnings per share are down, and Wonderla Holidays' dividend has been cut at least once in the past, which is disappointing. In summary, Wonderla Holidays 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.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 5 warning signs for Wonderla Holidays (of which 1 is concerning!) you should know about.

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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