Is Arab National Bank (TADAWUL:1080) A Good Fit For Your Dividend Portfolio?

By
Simply Wall St
Published
February 26, 2021
SASE:1080
Source: Shutterstock

Dividend paying stocks like Arab National Bank (TADAWUL:1080) 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.

In this case, Arab National Bank likely looks attractive to dividend investors, given its 5.2% dividend yield and seven-year payment history. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Arab National Bank for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

historic-dividend
SASE:1080 Historic Dividend February 27th 2021

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Arab National Bank paid out 36% 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. Plus, there is room to increase the payout ratio over time.

Remember, you can always get a snapshot of Arab National Bank'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. Arab National Bank has been paying a dividend for the past seven years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past seven-year period, the first annual payment was ر.س0.6 in 2014, compared to ر.س1.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.6% a year over that time. The dividends haven't grown at precisely 7.6% 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. Arab National Bank 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 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 not great to see that Arab National Bank's have fallen at approximately 6.9% over the past five years. 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.

Conclusion

To summarise, shareholders should always check that Arab National Bank's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see Arab National Bank has a low payout ratio, as this suggests earnings are being reinvested in the business. Earnings per share are down, and Arab National Bank's dividend has been cut at least once in the past, which is disappointing. Arab National Bank might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for Arab National Bank 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%.

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