Is It Worth Buying Mouwasat Medical Services Company (TADAWUL:4002) For Its 1.4% Dividend Yield?

Dividend paying stocks like Mouwasat Medical Services Company (TADAWUL:4002) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A slim 1.4% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Mouwasat Medical Services could have potential. Some simple analysis can reduce the risk of holding Mouwasat Medical Services for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Mouwasat Medical Services!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Mouwasat Medical Services paid out 47% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase 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. The company paid out 80% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It's positive to see that Mouwasat Medical Services' 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 Mouwasat Medical Services' financial position 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. Mouwasat Medical Services has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was ر.س0.5 in 2011, compared to ر.س2.5 last year. Dividends per share have grown at approximately 17% per year over this time.

With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Mouwasat Medical Services has grown its earnings per share at 20% per annum over the past five years. With high earnings per share growth in recent times and a modest payout ratio, we think this is an attractive combination if earnings can be reinvested to generate further growth.

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. Mouwasat Medical Services' dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. All things considered, Mouwasat Medical Services looks like a strong prospect. At the right valuation, it could be something special.

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. Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 Mouwasat Medical Services analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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