Dividend yields are a critical factor in my investment decisions. They represent the percentage of a stock’s market price that the company pays out to shareholders as dividends.
While a high yield can be tempting, I’ve learned that caution is essential when they appear unusually large. One key aspect to consider is dividend coverage, which indicates the company’s ability to cover its dividend payments with its earnings.
If a high-yielding stock lacks the earnings to support those payments, it’s a red flag. It could mean the company is tapping into reserves or taking on debt to maintain the dividend, which isn’t sustainable in the long term.
To avoid unreliable income sources, I always research a company’s financial health, earnings, and dividend history before trusting a high yield.
Big yield, unpopular stock
In December 2022, Steppe Cement dished out a 5p dividend per share. At the current share price, this translates to a whopping yield of 18.1%. That’s around 4.5 times higher than the FTSE 100 average.
While Steppe Cement has always offered a relatively high dividend yield, it’s important to note this partially reflects the lack of popularityof the stock. It’s currently trading at just 3.9 times its 2022 earnings, making it one of the most affordable stocks listed in the UK.
The primary reason behind this undervaluation is the natural hesitancy of investors when it comes to investing in a Kazakh cement manufacturer. Most of us prefer to stick to the FTSE 100, let alone a Central Asian firm with a £60m market cap.
Regardless of the company’s impressive performance in 2022, British investors are largely unfamiliar with the Kazakh market, leading to doubts about the investment opportunity.
In 2022, Steppe Cement’s 5p dividend payment was only covered 1.64 times by its earnings. Typically, a robust coverage ratio is considered to be around two times. Thus, Steppe’s coverage falls short of the desired level, indicating room for improvement.
Despite a promising Q3, 2023 has not been as lucrative for the business as 2022 was. In early October Steppe report revenue of KZT14.1bn (£24m) for Q1 — 8% higher year on year. However, revenue during the first half of the year was down 13% with lower volumes and lower prices. Overall for the first nine months of the year, revenue is down 5%.
The company anticipates a decrease in EBITDA for the fiscal year ending this December 31, compared to 2022. This is primarily attributed to a less favourable pricing environment and the effects of inflation on energy and other input costs.
So, is the dividend sustainable? Well, the coverage ratio call fall dangerously close to one — just enough income to pay the dividend — if EBITDA comes in weaker than expected. In H1, gross profit was 47% lower than in H1 of 2022. Despite a stronger Q3, I wouldn’t be surprise to see the dividend cut.
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James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
(The post is shared from syndication feed, it is not edited by Analyzing Market Team.)