Yahoo Finance Could IRESS Limited (ASX:IRE) Have The Makings Of Another Dividend Aristocrat?
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Today we'll take a closer look at IRESS Limited (ASX:IRE) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
With IRESS yielding 3.4% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
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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. IRESS paid out 122% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. IRESS paid out 99% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given IRESS's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Is IRESS's Balance Sheet Risky?
As IRESS's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. With net debt of 1.58 times its earnings before interest, tax, depreciation and amortisation (EBITDA), IRESS has an acceptable level of debt.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 15.79 times its interest expense, IRESS's interest cover is quite strong - more than enough to cover the interest expense.
We update our data on IRESS every 24 hours, so you can always get our latest analysis of its financial health, here.
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. IRESS has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was AU$0.32 in 2009, compared to AU$0.46 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.7% a year over that time.
Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think is seriously impressive.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see IRESS has grown its earnings per share at 16% per annum over the past five years. With a payout ratio of 122%, IRESS is paying out dividends substantially greater than what it earned in profit.
Conclusion
To summarise, shareholders should always check that IRESS'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 IRESS paying out a high percentage of both its cashflow and earnings. Next, growing earnings per share and steady dividend payments is a great combination. In sum, we find it hard to get excited about IRESS from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 7 IRESS analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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 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. Thank you for reading.
