Is Abu Dhabi Islamic Bank PJSC (ADX:ADIB) 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.
A high yield and a long history of paying dividends is an appealing combination for Abu Dhabi Islamic Bank PJSC. It would not be a surprise to discover that many investors buy it for the dividends.
The company also bought back stock during the year, equivalent to approximately 18% of the company’s market capitalisation at the time. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. 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.
Abu Dhabi Islamic Bank PJSC paid out 60% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
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.
Abu Dhabi Islamic Bank PJSC 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 د.إ0.2 in 2010, compared to د.إ0.3 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.9% a year over that time.
Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Abu Dhabi Islamic Bank PJSC’s earnings per share have been essentially flat over the past five years.
Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation.
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 Islamic Bank PJSC’s payout ratio is within normal bounds.
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. Abu Dhabi Islamic Bank PJSC might not be a bad business, but it doesn’t show all of the characteristics we look for in a dividend stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company.
Given that earnings are not growing, the dividend does not look nearly so attractive. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.
Source Simply Wall Street