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Sobha Limited (NSE: SOBHA) reduces its dividend to 3.50 on September 12. The dividend yield will be within the industry average range of 0.5%.
While dividend yield is important for income investors, it is also important to take into account any significant change in the price of the shares, as this will generally outweigh any gains from distributions. Investors will be delighted to see that the Sobha share price has risen 31% in the past 3 months, which is good for shareholders and may also explain a drop in dividend yield.
See our latest review for Sobha
Sobha’s payment has strong income coverage
Strong dividend yields are great, but they only really help us if the payout is sustainable. Prior to this announcement, Sobha’s dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its profits are kept to grow the business.
According to analysts, EPS is expected to be several times higher next year. If the dividend continues its recent trend, estimates indicate that the dividend could reach 11%, which we would be comfortable to see continue.
Dividend volatility
Although the company has a long history of dividends, it has been cut at least once in the past 10 years. The first annual payment in the last 10 years was 3.00 in 2011, and the payment for the most recent year was 3.50. This means that he increased his distributions by 1.6% per year during that period. It’s encouraging to see some dividend growth, but the dividend has been reduced at least once, and the magnitude of the reduction would eliminate most of the growth anyway, making it less attractive as a income investment.
The potential for dividend growth is fragile
With a relatively volatile dividend, it is even more important to see if earnings per share increase. Sobha’s earnings per share have declined 14% per year over the past five years. This sharp drop may indicate that the company is going through a difficult time, which could limit its ability to pay a larger dividend each year in the future. On the bright side, earnings should gain ground over the next year or so, but until that turns into a trend, we wouldn’t feel too comfortable.
Our thoughts on the Sobha dividend
In summary, reducing dividends is not ideal, but it can bring the payout into a more sustainable range. The company generates a lot of cash, which could hold the dividend for a while, but the track record is not great. We would probably look elsewhere for an income investment.
Market movements testify to the high value of a coherent dividend policy compared to a more unpredictable one. Meanwhile, despite the importance of dividend payments, they aren’t the only factors our readers should be aware of when valuing a business. For example, we have identified 4 warning signs for Sobha (1 is a bit worrying!) Which you should know before investing. We have also set up a list of global stocks with a solid dividend.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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