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Today we'll take a closer look at ABR Holdings Limited (SGX:533) 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. 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.
In this case, ABR Holdings likely looks attractive to investors, given its 3.1% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying ABR Holdings for its dividend, and we'll go through these below.
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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. Looking at the data, we can see that 188% of ABR Holdings'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.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. ABR Holdings paid out 97% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow.
With a strong net cash balance, ABR Holdings investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of ABR Holdings'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. ABR Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was S$0.02 in 2009, compared to S$0.025 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.3% a year over that time. The dividends haven't grown at precisely 2.3% every year, but this is a useful way to average out the historical rate of growth.