Is Koninklijke Ahold Delhaize N.V. (AMS:AD) A Smart Choice For Dividend Investors?
Today we'll take a closer look at Koninklijke Ahold Delhaize N.V. (AMS:AD) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With Koninklijke Ahold Delhaize yielding 3.1% 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 returned around 6.7% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Explore this interactive chart for our latest analysis on Koninklijke Ahold Delhaize!
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Looking at the data, we can see that 45% of Koninklijke Ahold Delhaize's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Koninklijke Ahold Delhaize's cash payout ratio in the last year was 40%, which suggests dividends were well covered by cash generated by the business. It's positive to see that Koninklijke Ahold Delhaize'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.
We update our data on Koninklijke Ahold Delhaize 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. For the purpose of this article, we only scrutinise the last decade of Koninklijke Ahold Delhaize's dividend 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 €0.21 in 2009, compared to €0.70 last year. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time.
It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Koninklijke Ahold Delhaize has done it, which we really like.
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. It's good to see Koninklijke Ahold Delhaize has been growing its earnings per share at 11% a year over the past five years. A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right in the cusp of its growth phase. At the right price, we might be interested.
Conclusion
To summarise, shareholders should always check that Koninklijke Ahold Delhaize's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Koninklijke Ahold Delhaize is paying out a low percentage of its earnings and cash flow. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. Koninklijke Ahold Delhaize has met all of our criteria, including having strong cash flow that covers the dividend. We definitely think it would be worthwhile looking closer.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 21 analysts we track are forecasting for Koninklijke Ahold Delhaize for free with public 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.
