Three Things You Should Check Before Buying Enprise Group Limited (NZSE:ENS) For Its Dividend

Simply Wall St

Mon, May 27, 2019, 8:03 PM

Today we'll take a closer look at Enprise Group Limited (NZSE:ENS) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Enprise Group pays a 5.9% dividend yield, and has been paying dividends for the past three years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple research can reduce the risk of buying Enprise Group for its dividend - read on to learn more.

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NZSE:ENS Historical Dividend Yield, May 28th 2019

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Enprise Group pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Enprise Group paid out 51% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business.

We update our data on Enprise Group every 24 hours, so you can always get our latest analysis of its financial health, here.

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 three-year period, the first annual payment was NZ$0.03 in 2016, compared to NZ$0.045 last year. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It's good to see Enprise Group has been growing its earnings per share at 23% a year over the past 5 years.

We'd also point out that Enprise Group issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

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 not keen on the fact that Enprise Group paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Ultimately, Enprise Group 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.

Are management backing themselves to deliver performance? Check their shareholdings in Enprise Group in our latest insider ownership analysis.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.

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. Thank you for reading.

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