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Should Global Indemnity Limited (NASDAQ:GBLI) Be Part Of Your Income Portfolio?

Simply Wall St

Today we'll take a closer look at Global Indemnity Limited (NASDAQ:GBLI) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Global Indemnity has only been paying a dividend for a year or so, so investors might be curious about its 3.7% yield. Some simple analysis can reduce the risk of holding Global Indemnity for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

NasdaqGS:GBLI Historical Dividend Yield, August 15th 2019

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 it reported a loss over the past 12 months, Global Indemnity currently pays a dividend. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

Consider getting our latest analysis on Global Indemnity's financial position 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. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. Its most recent annual dividend was US$1.00 per share.

It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Global Indemnity's earnings per share have shrunk at 50% 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 Global Indemnity's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Global Indemnity'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 it paying a dividend while reporting a loss over the past year. Second, the company has not been able to generate earnings growth, and its history of dividend payments too short for us to thoroughly evaluate the dividend's consistency across an economic cycle. In short, we're not keen on Global Indemnity from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.

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

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