Saudi Ceramic's (TADAWUL:2040) Dividend Will Be Reduced To SAR0.50

Saudi Ceramic Company (TADAWUL:2040) has announced that on 14th of August, it will be paying a dividend ofSAR0.50, which a reduction from last year's comparable dividend. This means that the annual payment will be 2.8% of the current stock price, which is in line with the average for the industry.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Saudi Ceramic's stock price has reduced by 30% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.

Check out our latest analysis for Saudi Ceramic

Saudi Ceramic's Dividend Is Well Covered By Earnings

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Saudi Ceramic's dividend was only 56% of earnings, however it was paying out 96% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Looking forward, earnings per share is forecast to rise by 39.3% over the next year. If the dividend continues on this path, the payout ratio could be 34% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was SAR1.09 in 2012, and the most recent fiscal year payment was SAR1.00. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Saudi Ceramic has seen EPS rising for the last five years, at 60% per annum. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.

Our Thoughts On Saudi Ceramic's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Saudi Ceramic is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Saudi Ceramic that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.