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Could United-Guardian, Inc. (NASDAQ:UG) 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 United-Guardian yielding 5.8% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Some simple research can reduce the risk of buying United-Guardian for its dividend – read on to learn more.
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, United-Guardian paid out 107% 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. With a cash payout ratio of 101%, United-Guardian’s dividend payments are poorly covered by cash flow. As United-Guardian’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.
Remember, you can always get a snapshot of United-Guardian’s latest financial position, by checking our visualisation of its financial health.
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. For the purpose of this article, we only scrutinise the last decade of United-Guardian’s dividend payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was US$0.56 in 2009, compared to US$1.10 last year. Dividends per share have grown at approximately 7.0% per year over this time. The dividends haven’t grown at precisely 7.0% every year, but this is a useful way to average out the historical rate of growth.
It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. United-Guardian might have put its house in order since then, but we remain cautious.
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? In the last five years, United-Guardian’s earnings per share have shrunk at approximately 5.2% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
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. United-Guardian 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 United-Guardian’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 United-Guardian from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Now, if you want to look closer, it would be worth checking out our free research on United-Guardian management tenure, salary, and performance.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.