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Here's How We Evaluate Kelly Partners Group Holdings Limited's (ASX:KPG) Dividend

Simply Wall St

Could Kelly Partners Group Holdings Limited (ASX:KPG) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. 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.

In this case, Kelly Partners Group Holdings pays a decent-sized 5.0% dividend yield, and has been distributing cash to shareholders for the past two years. A 5.0% yield does look good. Could the short payment history hint at future dividend growth? Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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ASX:KPG Historical Dividend Yield, October 8th 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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 82% of Kelly Partners Group Holdings's profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Kelly Partners Group Holdings's cash payout ratio in the last year was 26%, which suggests dividends were well covered by cash generated by the business. It's positive to see that Kelly Partners Group Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Consider getting our latest analysis on Kelly Partners Group Holdings's financial position 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. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past two-year period, the first annual payment was AU$0.04 in 2017, compared to AU$0.048 last year. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time.

We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Kelly Partners Group Holdings has grown its earnings per share at 14% per annum over the past five years. Earnings per share are growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Kelly Partners Group Holdings is not retaining those earnings to reinvest in growth.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we think Kelly Partners Group Holdings has an acceptable payout ratio and its dividend is well covered by cashflow. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Overall we think Kelly Partners Group Holdings is an interesting dividend stock, although it could be better.

See if management have their own wealth at stake, by checking insider shareholdings in Kelly Partners Group Holdings stock.

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.