Is Grupa Azoty Zaklady Chemiczne Police S.A. (WSE:PCE) At Risk Of Cutting Its Dividend?
Is Grupa Azoty Zaklady Chemiczne Police S.A. (WSE:PCE) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 a six-year payment history and a 3.6% yield, many investors probably find Grupa Azoty Zaklady Chemiczne Police intriguing. It sure looks interesting on these metrics - but there's always more to the story . Some simple research can reduce the risk of buying Grupa Azoty Zaklady Chemiczne Police for its dividend - read on to learn more.
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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Grupa Azoty Zaklady Chemiczne Police pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Of the free cash flow it generated last year, Grupa Azoty Zaklady Chemiczne Police paid out 33% as dividends, suggesting the dividend is affordable.
Is Grupa Azoty Zaklady Chemiczne Police's Balance Sheet Risky?
Given Grupa Azoty Zaklady Chemiczne Police is paying a dividend but reported a loss over the past year, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures a company's total debt load relative to its earnings (lower = less debt), while net interest cover measures the company's ability to pay the interest on its debt (higher = greater ability to pay interest costs). Grupa Azoty Zaklady Chemiczne Police has net debt of 1.34 times its earnings before interest, tax, depreciation and amortisation (EBITDA), which is generally seen as an acceptable level of debt.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. With EBIT of less than 1 times its interest expense, Grupa Azoty Zaklady Chemiczne Police's financial situation is potentially quite concerning. Readers should investigate whether it might be at risk of breaching the minimum requirements on its loans.
Consider getting our latest analysis on Grupa Azoty Zaklady Chemiczne Police's financial position here.
Dividend Volatility
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. Looking at the data, we can see that Grupa Azoty Zaklady Chemiczne Police has been paying a dividend for the past six years. It's good to see that Grupa Azoty Zaklady Chemiczne Police has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was zł0.67 in 2013, compared to zł0.53 last year. This works out to be a decline of approximately 3.8% per year over that time. Grupa Azoty Zaklady Chemiczne Police's dividend hasn't shrunk linearly at -3.8% per annum, but the CAGR is a useful estimate of the historical rate of change.
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? Over the past five years, it looks as though Grupa Azoty Zaklady Chemiczne Police's EPS have declined at around 2.7% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.
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. We're not keen on the fact that Grupa Azoty Zaklady Chemiczne Police paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, Grupa Azoty Zaklady Chemiczne Police 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.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Grupa Azoty Zaklady Chemiczne Police stock.
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 editorial-team@simplywallst.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.
