Is Al-Yamamah Steel Industries Company's (TADAWUL:1304) 2.9% Dividend Sustainable?

Could Al-Yamamah Steel Industries Company (TADAWUL:1304) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.

Investors might not know much about Al-Yamamah Steel Industries's dividend prospects, even though it has been paying dividends for the last five years and offers a 2.9% yield. A 2.9% yield is not inspiring, but the longer payment history has some appeal. That said, the recent jump in the share price will make Al-Yamamah Steel Industries's dividend yield look smaller, even though the company prospects could be improving. Some simple research can reduce the risk of buying Al-Yamamah Steel Industries for its dividend - read on to learn more.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Looking at the data, we can see that 50% of Al-Yamamah Steel Industries' profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Consider getting our latest analysis on Al-Yamamah Steel Industries' 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. Looking at the data, we can see that Al-Yamamah Steel Industries has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ر.س3.0 in 2016, compared to ر.س1.0 last year. Dividend payments have fallen sharply, down 67% over that time.

A shrinking dividend over a five-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's not great to see that Al-Yamamah Steel Industries' have fallen at approximately 7.6% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Al-Yamamah Steel Industries' payout ratio is within normal bounds. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Al-Yamamah Steel Industries might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

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 4 warning signs for Al-Yamamah Steel Industries you should be aware of, and 1 of them is a bit concerning.

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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