100-200 words on the dividend payout policy of Metro Bank.
Karan Makhijani
DIVIDENDPAYOUT.docxDIVIDEND PAYOUT
Dividend payout is the amount of cash that a company sends to its shareholders in the form of dividends. The company can decide to send all profits back to its investors, or could keep a portion of it as retained earnings ( http://www.investorwords.com ). In a dividend payout option, the fund pays out dividend from time to time as and when a dividend is declared
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. HSBC Holdings paid out 79% of its profit as dividends, over the trailing twelve month period. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
HSBC 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. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was US$0.64 in 2010, compared to US$0.51 last year. The dividend has shrunk at around 2.2% a year during that period. HSBC Holdings dividend hasn't shrunk linearly at 2.2% per annum, but the CAGR is a useful estimate of the historical rate of change.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Bank of Georgia Group’s 4.6% dividend, as it has only been paying distributions for a year or so. The company also returned around 1.4% of its market capitalization to shareholders in the form of stock buybacks over the past year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Bank of Georgia Group paid out 26% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
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. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. This works out to be a compound annual growth rate (CAGR) of approximately 4.5% a year over that time.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. It’s good to see Bank of Georgia Group has been growing its earnings per share at 11% a year over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.
Conclusion
To summarise, shareholders should always check that Bank of Georgia Group’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re glad to see Bank of Georgia Group has a low payout ratio, as this suggests earnings are being reinvested in the business. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Overall we think Bank of Georgia Group is an interesting dividend stock, although it could be better.
