Dividend paying stocks like M Winkworth PLC (LON:WINK) 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. 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.
A high yield and a long history of paying dividends is an appealing combination for M Winkworth. It would not be a surprise to discover that many investors buy it for the dividends. The company also returned around 4.0% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple research can reduce the risk of buying M Winkworth for its dividend – read on to learn more.
Explore this interactive chart for our latest analysis on M Winkworth!
AIM:WINK Historical Dividend Yield May 5th 2020
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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, M Winkworth paid out 77% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. M Winkworth paid out 56% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It’s positive to see that M Winkworth’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
With a strong net cash balance, M Winkworth investors may not have much to worry about in the near term from a dividend perspective.
We update our data on M Winkworth every 24 hours, so you can always get our latest analysis of its financial health, here.
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. For the purpose of this article, we only scrutinise the last decade of M Winkworth’s dividend 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 ten-year period, the first annual payment was UK£0.046 in 2010, compared to UK£0.084 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.3% a year over that time.
Companies like this, growing their dividend at a decent rate, can be very valuable over the long term, if the rate of growth can be maintained.
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. Over the past five years, it looks as though M Winkworth’s EPS have declined at around 3.1% 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. M Winkworth’s is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. 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. Ultimately, M Winkworth comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We’ve spotted 3 warning signs for M Winkworth (of which 1 makes us a bit uncomfortable!) you should know about.
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 [email protected]. 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.
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. Thank you for reading.