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Is Wawel S.A. (WSE:WWL) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.
In this case, Wawel likely looks attractive to investors, given its 3.9% dividend yield and a payment history of over ten years. We’d guess that plenty of investors have purchased it for the income. Remember that the recent share price drop will make Wawel’s yield look higher, even though recent events might have impacted the company’s prospects. Some simple research can reduce the risk of buying Wawel for its dividend – read on to learn more.
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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Wawel paid out 55% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Wawel’s cash payout ratio in the last year was 32%, which suggests dividends were well covered by cash generated by 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.
Consider getting our latest analysis on Wawel’s financial position here.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Wawel has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was zł10.00 in 2009, compared to zł25.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.6% a year over that time.
Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Over the past five years, it looks as though Wawel’s EPS have declined at around 3.2% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
To summarise, shareholders should always check that Wawel’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 think Wawel has an acceptable payout ratio and its dividend is well covered by cashflow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Wawel out there.
Given that earnings are not growing, the dividend does not look nearly so attractive. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 3 analysts we track are forecasting for the future.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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.
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. Thank you for reading.