Dividend paying stocks like Entravision Communications Corporation (NYSE:EVC) 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. 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.
Investors might not know much about Entravision Communications's dividend prospects, even though it has been paying dividends for the last eight years and offers a 2.9% yield. A 2.9% yield is not inspiring, but the longer payment history has some appeal. During the year, the company also conducted a buyback equivalent to around 1.3% of its market capitalisation. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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. 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. Although Entravision Communications pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
The company paid out 65% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Entravision Communications has available to meet other needs.
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. The first recorded dividend for Entravision Communications, in the last decade, was eight years ago. The company has been paying a stable dividend for a while now, which is great. However we'd prefer to see consistency for a few more years before giving it our full seal of approval. During the past eight-year period, the first annual payment was US$0.1 in 2013, compared to US$0.1 last year. This works out to be a decline of approximately 2.3% per year over that time.
A shrinking dividend over a eight-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
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. Entravision Communications' earnings per share have shrunk at 28% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Entravision Communications' earnings per share, which support the dividend, have been anything but stable.
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 a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. Using these criteria, Entravision Communications looks quite suboptimal from a dividend investment perspective.
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 Entravision Communications you should be aware of, and 1 of them is concerning.
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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