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Is Centaur Media Plc's (LON:CAU) 8.3% Dividend Sustainable?

Simply Wall St

Is Centaur Media Plc (LON:CAU) 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 Centaur Media yielding 8.3% 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. The company also bought back stock during the year, equivalent to approximately 1.5% of the company's market capitalisation at the time. 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.

Explore this interactive chart for our latest analysis on Centaur Media!

LSE:CAU Historical Dividend Yield, January 5th 2020

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. Although Centaur Media 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.

Centaur Media paid out 120% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow.

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

We update our data on Centaur Media every 24 hours, so you can always get our latest analysis of its financial health, here.

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. Centaur Media 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 by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was UK£0.015 in 2010, compared to UK£0.03 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.2% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Centaur Media's earnings per share have shrunk at 43% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Centaur Media's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Centaur Media'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 Centaur Media paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share are down, and Centaur Media's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Centaur Media from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Now, if you want to look closer, it would be worth checking out our free research on Centaur Media management tenure, salary, and performance.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.