Today we'll take a closer look at Cerillion PLC (LON:CER) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Some readers mightn't know much about Cerillion's 2.7% dividend, as it has only been paying distributions for the last three years. While it may not look like much, if earnings are growing it could become quite interesting. Some simple research can reduce the risk of buying Cerillion for its dividend - read on to learn more.
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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. Cerillion paid out 191% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Cerillion paid out 109% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. As Cerillion'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.
While the above analysis focuses on dividends relative to a company's earnings, we do note Cerillion's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of Cerillion's latest financial position, by checking our visualisation of its financial health.
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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past three-year period, the first annual payment was UK£0.026 in 2016, compared to UK£0.045 last year. Dividends per share have grown at approximately 20% per year over this time.