Stock Analysis

Know This Before Buying Yanbu National Petrochemical Company (TADAWUL:2290) For Its Dividend

SASE:2290
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Could Yanbu National Petrochemical Company (TADAWUL:2290) 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.

With a eight-year payment history and a 3.8% yield, many investors probably find Yanbu National Petrochemical intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding Yanbu National Petrochemical for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Yanbu National Petrochemical!

historic-dividend
SASE:2290 Historic Dividend February 22nd 2021

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. In the last year, Yanbu National Petrochemical paid out 208% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Yanbu National Petrochemical paid out 113% of its free cash flow last year, which we think is concerning if cash flows do not improve. Cash is slightly more important than profit from a dividend perspective, but given Yanbu National Petrochemical's payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Yanbu National Petrochemical's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Yanbu National Petrochemical's latest financial position, by checking our visualisation of its financial health.

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 last decade of data, we can see that Yanbu National Petrochemical paid its first dividend at least eight years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past eight-year period, the first annual payment was ر.س2.0 in 2013, compared to ر.س2.5 last year. Dividends per share have grown at approximately 2.8% per year over this time. The dividends haven't grown at precisely 2.8% every year, but this is a useful way to average out the historical rate of growth.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

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. Yanbu National Petrochemical's earnings per share have shrunk at 11% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

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. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In this analysis, Yanbu National Petrochemical doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Yanbu National Petrochemical that investors need to be conscious of moving forward.

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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