Does It Make Sense To Buy Saudi Pharmaceutical Industries and Medical Appliances Corporation (TADAWUL:2070) For Its Yield?

Could Saudi Pharmaceutical Industries and Medical Appliances Corporation (TADAWUL:2070) 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.

While Saudi Pharmaceutical Industries and Medical Appliances's 2.4% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on Saudi Pharmaceutical Industries and Medical Appliances!

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. While Saudi Pharmaceutical Industries and Medical Appliances pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Saudi Pharmaceutical Industries and Medical Appliances paid out 114% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow.

Consider getting our latest analysis on Saudi Pharmaceutical Industries and Medical Appliances' 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. Saudi Pharmaceutical Industries and Medical Appliances 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.س1.0 in 2011, compared to ر.س1.0 last year. Its dividends have grown at less than 1% per annum over this time frame.

Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

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. Saudi Pharmaceutical Industries and Medical Appliances' EPS have fallen by approximately 65% 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 Saudi Pharmaceutical Industries and Medical Appliances' earnings per share, which support the dividend, have been anything but stable.

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 a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Moreover, earnings have been shrinking. While the dividends have been fairly steady, we'd wonder for how much longer this will be sustainable if earnings continue to decline. Using these criteria, Saudi Pharmaceutical Industries and Medical Appliances looks quite suboptimal from a dividend investment perspective.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. 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 2 warning signs for Saudi Pharmaceutical Industries and Medical Appliances that investors should know about before committing capital to this stock.

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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