Dividend paying stocks like UHY ECA S.A. (WSE:ECA) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A 2.7% yield is nothing to get excited about, but investors probably think the long payment history suggests UHY ECA has some staying power. That said, the recent jump in the share price will make UHY ECA's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying UHY ECA for its dividend, and we'll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. UHY ECA paid out 34% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. UHY ECA paid out 11% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that UHY ECA's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
While the above analysis focuses on dividends relative to a company's earnings, we do note UHY ECA's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Consider getting our latest analysis on UHY ECA's financial position here.
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. UHY ECA 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 zł0.1 in 2011, compared to zł0.03 last year. The dividend has fallen 79% over that period.
A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
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. UHY ECA's earnings per share have been essentially flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.
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. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. Overall we think UHY ECA is an interesting dividend stock, although it could be better.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, UHY ECA has 5 warning signs (and 2 which are potentially serious) we think 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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