Is Domain Holdings Australia Limited (ASX:DHG) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
With only a two-year payment history, and a 2.4% yield, investors probably think Domain Holdings Australia is not much of a dividend stock. While it may not look like much, if earnings are growing it could become quite interesting. Remember though, given the recent drop in its share price, Domain Holdings Australia’s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.
Explore this interactive chart for our latest analysis on Domain Holdings Australia!
ASX:DHG Historical Dividend Yield May 4th 2020
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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Domain Holdings Australia paid out 92% of its profit as dividends, over the trailing twelve month period. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Domain Holdings Australia paid out 101% of its free cash flow last year, which we think is concerning if cash flows do not improve. As Domain Holdings Australia’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.
Is Domain Holdings Australia’s Balance Sheet Risky?
As Domain Holdings Australia’s dividend was not well covered by earnings, 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 total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With net debt of 2.38 times its EBITDA, Domain Holdings Australia’s debt burden is within a normal range for most listed companies.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Net interest cover of 8.79 times its interest expense appears reasonable for Domain Holdings Australia, although we’re conscious that even high interest cover doesn’t make a company bulletproof.
Remember, you can always get a snapshot of Domain Holdings Australia’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 two-year period, the first annual payment was AU$0.08 in 2018, compared to AU$0.06 last year. This works out to a decline of approximately 25% over that time.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Domain Holdings Australia’s EPS have fallen by approximately 22% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Domain Holdings Australia’s earnings per share, which support the dividend, have been anything but stable.
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. We’re a bit uncomfortable with Domain Holdings Australia paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and Domain Holdings Australia’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 Domain Holdings Australia from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
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. Taking the debate a bit further, we’ve identified 2 warning signs for Domain Holdings Australia that investors need to be conscious of moving forward.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
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