Is Enprise Group Limited’s (NZSE:ENS) 2.9% Dividend Sustainable?

Is Enprise Group Limited (NZSE:ENS) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

With a 2.9% yield and a four-year payment history, investors probably think Enprise Group looks like a reliable dividend stock. A 2.9% yield is not inspiring, but the longer payment history has some appeal. Some simple analysis can reduce the risk of holding Enprise Group for its dividend, and we’ll focus on the most important aspects below.

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NZSE:ENS Historical Dividend Yield, February 28th 2020NZSE:ENS Historical Dividend Yield, February 28th 2020

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.

Of the free cash flow it generated last year, Enprise Group paid out 35% as dividends, suggesting the dividend is affordable.

With a strong net cash balance, Enprise Group investors may not have much to worry about in the near term from a dividend perspective.

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

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Looking at the data, we can see that Enprise Group has been paying a dividend for the past four years. 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 four-year period, the first annual payment was NZ$0.03 in 2016, compared to NZ$0.02 last year. The dividend has shrunk at around 9.6% a year during that period. Enprise Group’s dividend has been cut sharply at least once, so it hasn’t fallen by 9.6% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Enprise Group for its dividend, given that payments have shrunk over the past four years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. Over the past five years, it looks as though Enprise Group’s EPS have declined at around 32% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Enprise Group’s earnings per share, which support the dividend, have been anything but stable.

We’d also point out that Enprise Group 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.

Conclusion

To summarise, shareholders should always check that Enprise 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 a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Overall, Enprise Group falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Enprise Group stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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.

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