Dividend paying stocks like Enprise Group Limited ( NZSE:ENS ) 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.
With a four-year payment history and a 3.2% yield, many investors probably find Enprise Group intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding Enprise Group for its dividend, and we'll focus on the most important aspects below.
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although Enprise Group pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Enprise Group paid out a conservative 35% of its free cash flow as dividends last year.
With a strong net cash balance, Enprise Group investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Enprise Group's latest financial position, by checking our visualisation of its financial health .
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. Enprise Group has been paying a dividend for the past four years. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past four-year period, the first annual payment was NZ$0.03 in 2016, compared to NZ$0.02 last year. This works out to be a decline of approximately 9.6% per year over that time. Enprise Group's dividend has been cut sharply at least once, so it hasn't fallen by 9.6% every year, but this is a decent approximation of the long term change.
We struggle to make a case for buying Enprise Group for its dividend, given that payments have shrunk over the past four years.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though Enprise Group's EPS have declined at around 32% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Enprise Group's earnings per share, which support the dividend, have been anything but stable.
We'd also point out that Enprise Group issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're not keen on the fact that Enprise Group paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. 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. With this information in mind, we think Enprise Group may not be an ideal dividend stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 4 warning signs for Enprise Group (3 make us uncomfortable!) that you should be aware of before investing.
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 firstname.lastname@example.org . 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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