Stock Analysis

Read 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Yanbu National Petrochemical is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

historic-dividend
SASE:2290 Historic Dividend November 23rd 2020

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. 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 327% of Yanbu National Petrochemical's profits were paid out as dividends in the last 12 months. 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 107% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. As Yanbu National Petrochemical's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

With a strong net cash balance, Yanbu National Petrochemical investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Yanbu National Petrochemical's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the data, we can see that Yanbu National Petrochemical has been paying a dividend for the past seven years. It's good to see that Yanbu National Petrochemical has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was ر.س2.0 in 2013, compared to ر.س2.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.2% a year over that time. Yanbu National Petrochemical's dividend payments have fluctuated, so it hasn't grown 3.2% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

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? Yanbu National Petrochemical's EPS have fallen by approximately 27% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Yanbu National Petrochemical's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Yanbu National Petrochemical's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. 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 are down, and Yanbu National Petrochemical's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Yanbu National Petrochemical from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

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. For example, we've picked out 2 warning signs for Yanbu National Petrochemical that investors should know about before committing capital to this stock.

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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