Could Pekabex S.A. (WSE:PBX) 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. 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.
Investors might not know much about Pekabex's dividend prospects, even though it has been paying dividends for the last five years and offers a 0.9% yield. While the yield may not look too great, the relatively long payment history is interesting. That said, the recent jump in the share price will make Pekabex's dividend yield look smaller, even though the company prospects could be improving. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. 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, Pekabex paid out 7.3% of its profit as dividends. 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. Pekabex paid out 363% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. While Pekabex's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Pekabex to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Consider getting our latest analysis on Pekabex's financial position 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. Pekabex has been paying a dividend for the past five years. During the past five-year period, the first annual payment was zł0.09 in 2016, compared to zł0.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 12% 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.
Pekabex has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's good to see Pekabex has been growing its earnings per share at 15% a year over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.
To summarise, shareholders should always check that Pekabex's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like Pekabex's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Pekabex out there.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Pekabex that investors should take into consideration.
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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