Should You Buy Southern Province Cement Company (TADAWUL:3050) For Its Dividend?

Today we'll take a closer look at Southern Province Cement Company (TADAWUL:3050) 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. 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 nine-year payment history and a 5.9% yield, many investors probably find Southern Province Cement intriguing. We'd agree the yield does look enticing. Some simple research can reduce the risk of buying Southern Province Cement for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Southern Province Cement!

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. 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, Southern Province Cement paid out 109% 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.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 70% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Southern Province Cement has available to meet other needs. It's good to see that while Southern Province Cement's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

With a strong net cash balance, Southern Province Cement investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Southern Province Cement'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 last decade of data, we can see that Southern Province Cement paid its first dividend at least nine 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 nine-year period, the first annual payment was ر.س6.0 in 2012, compared to ر.س5.0 last year. The dividend has shrunk at around 2.0% a year during that period. Southern Province Cement's dividend has been cut sharply at least once, so it hasn't fallen by 2.0% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Southern Province Cement for its dividend, given that payments have shrunk over the past nine years.

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? Over the past five years, it looks as though Southern Province Cement's EPS have declined at around 10% a year. 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. We're not keen on the fact that Southern Province Cement paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and Southern Province Cement'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 Southern Province Cement from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Southern Province Cement 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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