Should You Buy Qatar Fuel Company Q.P.S.C.("WOQOD") (DSM:QFLS) For Its Dividend?

Could Qatar Fuel Company Q.P.S.C.("WOQOD") (DSM:QFLS) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With Qatar Fuel Company Q.P.S.C.(WOQOD) yielding 4.2% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Qatar Fuel Company Q.P.S.C.(WOQOD) for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Qatar Fuel Company Q.P.S.C.(WOQOD) paid out 103% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Qatar Fuel Company Q.P.S.C.(WOQOD) pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

While the above analysis focuses on dividends relative to a company's earnings, we do note Qatar Fuel Company Q.P.S.C.(WOQOD)'s strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Qatar Fuel Company Q.P.S.C.(WOQOD)'s latest financial position, by checking our visualisation of its financial health.

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. For the purpose of this article, we only scrutinise the last decade of Qatar Fuel Company Q.P.S.C.(WOQOD)'s dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was ر.ق0.3 in 2010, compared to ر.ق0.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.7% a year over that time. The dividends haven't grown at precisely 9.7% every year, but this is a useful way to average out the historical rate of growth.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Qatar Fuel Company Q.P.S.C.(WOQOD) might have put its house in order since then, but we remain cautious.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. In the last five years, Qatar Fuel Company Q.P.S.C.(WOQOD)'s earnings per share have shrunk at approximately 7.4% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

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 a bit uncomfortable with Qatar Fuel Company Q.P.S.C.(WOQOD) paying out a high percentage of both its cashflow and earnings. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with Qatar Fuel Company Q.P.S.C.(WOQOD) from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 2 warning signs for Qatar Fuel Company Q.P.S.C.(WOQOD) (of which 1 shouldn't be ignored!) 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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