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Is ABC arbitrage SA (EPA:ABCA) The Right Choice For A Smart Dividend Investor?

Is ABC arbitrage SA (EPA:ABCA) 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.

In this case, ABC arbitrage likely looks attractive to investors, given its 6.9% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. The company also bought back stock during the year, equivalent to approximately 0.8% of the company's market capitalisation at the time. Some simple analysis can reduce the risk of holding ABC arbitrage for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

ENXTPA:ABCA Historical Dividend Yield, January 22nd 2020
ENXTPA:ABCA Historical Dividend Yield, January 22nd 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. 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. ABC arbitrage paid out 68% of its profit as dividends, over the trailing twelve month period. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

We update our data on ABC arbitrage 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. For the purpose of this article, we only scrutinise the last decade of ABC arbitrage's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past ten-year period, the first annual payment was €0.75 in 2010, compared to €0.46 last year. The dividend has shrunk at around 4.8% a year during that period. ABC arbitrage's dividend has been cut sharply at least once, so it hasn't fallen by 4.8% every year, but this is a decent approximation of the long term 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.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see ABC arbitrage has grown its earnings per share at 12% per annum over the past five years. Earnings per share have been growing rapidly, but given that it is paying out more than half of its earnings as dividends, we wonder how ABC arbitrage will keep funding its growth projects in the future.

Conclusion

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. ABC arbitrage's payout ratio is within normal bounds. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. ABC arbitrage 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 ABC arbitrage stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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.

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. Thank you for reading.