Abdullah Al-Othaim Markets Company (TADAWUL:4001) has announced it will be reducing its dividend payable on the 30th of March to ر.س2.00, which is 33% lower than what investors received last year. However, the dividend yield of 3.6% is still a decent boost to shareholder returns.
Abdullah Al-Othaim Markets Doesn't Earn Enough To Cover Its Payments
A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Abdullah Al-Othaim Markets' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.
The next 12 months is set to see EPS grow by 33.6%. If the dividend continues on its recent course, the payout ratio in 12 months could be 117%, which is a bit high and could start applying pressure to the balance sheet.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from ر.س0.75 in 2012 to the most recent annual payment of ر.س5.00. This implies that the company grew its distributions at a yearly rate of about 21% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
There Isn't Much Room To Grow The Dividend
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. It's encouraging to see Abdullah Al-Othaim Markets has been growing its earnings per share at 5.2% a year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.
Our Thoughts On Abdullah Al-Othaim Markets' Dividend
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Abdullah Al-Othaim Markets that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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.