Is ULMA Construccion Polska S.A. (WSE:ULM) A Great Dividend Stock?

Dividend paying stocks like ULMA Construccion Polska S.A. (WSE:ULM) 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.

A high yield and a long history of paying dividends is an appealing combination for ULMA Construccion Polska. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying ULMA Construccion Polska for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on ULMA Construccion Polska!

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. 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, ULMA Construccion Polska paid out 42% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. ULMA Construccion Polska paid out 60% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

With a strong net cash balance, ULMA Construccion Polska investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on ULMA Construccion Polska's financial position 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. ULMA Construccion Polska has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was zł1.6 in 2011, compared to zł2.6 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.1% a year over that time. ULMA Construccion Polska's dividend payments have fluctuated, so it hasn't grown 5.1% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

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? It's good to see ULMA Construccion Polska has been growing its earnings per share at 50% a year over the past five years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.

Conclusion

To summarise, shareholders should always check that ULMA Construccion Polska's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. ULMA Construccion Polska's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. ULMA Construccion Polska has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

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. Taking the debate a bit further, we've identified 2 warning signs for ULMA Construccion Polska that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you decide to trade ULMA Construccion Polska, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.