Factors Income Investors Should Consider Before Adding Ataa Educational Company (TADAWUL:4292) To Their Portfolio

Today we'll take a closer look at Ataa Educational Company (TADAWUL:4292) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Ataa Educational has only been paying a dividend for a year or so, so investors might be curious about its 2.6% yield. There are a few simple ways to reduce the risks of buying Ataa Educational for its dividend, and we'll go through these below.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Ataa Educational paid out 62% of its profit as dividends, over the trailing twelve month period. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Ataa Educational paid out 66% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's positive to see that Ataa Educational's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Consider getting our latest analysis on Ataa Educational's financial position here.

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. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. Its most recent annual dividend was ر.س1.0 per share.

We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Ataa Educational's earnings per share have shrunk at 18% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Ataa Educational's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Ataa Educational's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Ataa Educational's is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Earnings per share are down, and to our mind Ataa Educational has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In summary, Ataa Educational has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

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. Just as an example, we've come accross 2 warning signs for Ataa Educational you should be aware of, and 1 of them doesn't sit too well with us.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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