Key Things To Consider Before Buying Abdullah Al-Othaim Markets Company (TADAWUL:4001) For Its Dividend

Dividend paying stocks like Abdullah Al-Othaim Markets Company (TADAWUL:4001) 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. 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.

A high yield and a long history of paying dividends is an appealing combination for Abdullah Al-Othaim Markets. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Abdullah Al-Othaim Markets for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Abdullah Al-Othaim Markets!

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. Looking at the data, we can see that 91% of Abdullah Al-Othaim Markets' profits were paid out as dividends in the last 12 months. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 54% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Abdullah Al-Othaim Markets has available to meet other needs. While the dividend was not well covered by profits, at least they were covered by free cash flow. Even so, if the company were to continue paying out almost all of its profits, we'd be concerned about whether the dividend is sustainable in a downturn.

With a strong net cash balance, Abdullah Al-Othaim Markets investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Abdullah Al-Othaim Markets every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Abdullah Al-Othaim Markets' dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was ر.س0.8 in 2011, compared to ر.س6.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 23% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

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? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Abdullah Al-Othaim Markets has grown its earnings per share at 14% per annum over the past five years. Although earnings per share are up nicely Abdullah Al-Othaim Markets is paying out 91% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're not keen on the fact that Abdullah Al-Othaim Markets paid out such a high percentage of its income, although its cashflow is in better shape. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, Abdullah Al-Othaim Markets comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. 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 Abdullah Al-Othaim Markets that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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