Is Abu Dhabi National Oil Company for Distribution PJSC (ADX:ADNOCDIST) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
Abu Dhabi National Oil Company for Distribution PJSC pays a 5.5% dividend yield, and has been paying dividends for the past three years. It’s certainly an attractive yield, but readers are likely curious about its staying power. Some simple analysis can reduce the risk of holding Abu Dhabi National Oil Company for Distribution PJSC for its dividend, and we’ll focus on the most important aspects below.
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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, Abu Dhabi National Oil Company for Distribution PJSC paid out 119% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Abu Dhabi National Oil Company for Distribution PJSC paid out 291% of its free cash last year. Cash flows can be lumpy, but this dividend was not well 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. Cash is slightly more important than profit from a dividend perspective, but given Abu Dhabi National Oil Company for Distribution PJSC’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Remember, you can always get a snapshot of Abu Dhabi National Oil Company for Distribution PJSC’s latest financial position, by checking our visualisation of its financial health.
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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we’re not ready to live on. During the past three-year period, the first annual payment was د.إ0.06 in 2017, compared to د.إ0.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 52% a year over that time. Abu Dhabi National Oil Company for Distribution PJSC’s dividend payments have fluctuated, so it hasn’t grown 52% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
Abu Dhabi National Oil Company for Distribution PJSC has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Abu Dhabi National Oil Company for Distribution PJSC has grown its earnings per share at 9.9% per annum over the past five years. Although per-share earnings are growing at a credible rate, virtually all of the income is being paid out as dividends to shareholders. This is okay, but may limit growth in the company’s future dividend payments.
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. Abu Dhabi National Oil Company for Distribution PJSC paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. In summary, Abu Dhabi National Oil Company for Distribution PJSC has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.
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. Just as an example, we’ve come accross 4 warning signs for Abu Dhabi National Oil Company for Distribution PJSC you should be aware of, and 2 of them are 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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