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Is Geneva Finance Limited (NZSE:GFL) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
In this case, Geneva Finance pays a decent-sized 5.8% dividend yield, and has been distributing cash to shareholders for the past two years. A 5.8% yield does look good. Could the short payment history hint at future dividend growth? There are a few simple ways to reduce the risks of buying Geneva Finance for its dividend, and we’ll go through these below.
Explore this interactive chart for our latest analysis on Geneva Finance!
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Looking at the data, we can see that 61% of Geneva Finance’s profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We update our data on Geneva Finance every 24 hours, so you can always get our latest analysis of its financial health, here.
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’s dividend has been unstable, and with a relatively short history, we think it’s a little soon to draw strong conclusions about its long term dividend potential. During the past two-year period, the first annual payment was NZ$0.02 in 2017, compared to NZ$0.035 last year. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time. Geneva Finance’s dividend payments have fluctuated, so it hasn’t grown 32% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
Geneva Finance has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It’s good to see Geneva Finance has been growing its earnings per share at 45% a year over the past 5 years. With recent, rapid earnings per share growth and a payout ratio of 61%, this business looks like an interesting prospect if earnings are reinvested effectively.
We’d also point out that Geneva Finance issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think Geneva Finance has an acceptable payout ratio. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Geneva Finance might not be a bad business, but it doesn’t show all of the characteristics we look for in a dividend stock.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Geneva Finance stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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 firstname.lastname@example.org. 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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