Tread With Caution Around Makkah Construction & Development Company's (TADAWUL:4100) 2.4% Dividend Yield

Dividend paying stocks like Makkah Construction & Development Company (TADAWUL:4100) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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.

A 2.4% yield is nothing to get excited about, but investors probably think the long payment history suggests Makkah Construction & Development has some staying power. Some simple analysis can reduce the risk of holding Makkah Construction & Development for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Makkah Construction & Development!

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. 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 1,846% of Makkah Construction & Development'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. With a cash payout ratio of 2,832%, Makkah Construction & Development's dividend payments are poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. As Makkah Construction & Development'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.

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

We update our data on Makkah Construction & Development every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Makkah Construction & Development's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. Its most recent annual dividend was ر.س1.5 per share, effectively flat on its first payment 10 years ago.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Makkah Construction & Development's EPS have fallen by approximately 47% per year during 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

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Makkah Construction & Development paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share are down, and Makkah Construction & Development'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 Makkah Construction & Development 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. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 3 warning signs for Makkah Construction & Development 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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