Could Centamin plc (LON:CEY) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With a five-year payment history and a 3.5% yield, many investors probably find Centamin intriguing. We'd agree the yield does look enticing. 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 Centamin!
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. Looking at the data, we can see that 151% of Centamin's profits were paid out as dividends in the last 12 months. 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. Centamin's cash payout ratio in the last year was 48%, which suggests dividends were well covered by cash generated by the business. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Centamin fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
With a strong net cash balance, Centamin investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Centamin 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. Centamin has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.017 in 2014, compared to US$0.055 last year. Dividends per share have grown at approximately 26% per year over this time. The dividends haven't grown at precisely 26% every year, but this is a useful way to average out the historical rate of growth.