Today we'll take a closer look at PPDAI Group Inc. (NYSE:PPDF) 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.
PPDAI Group has only been paying a dividend for a year or so, so investors might be curious about its 6.1% yield. There are a few simple ways to reduce the risks of buying PPDAI Group for its dividend, and we'll go through these below.
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. In the last year, PPDAI Group paid out 14% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.
Remember, you can always get a snapshot of PPDAI Group's latest financial position, by checking our visualisation of its financial health.
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 CN¥1.27 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. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. It's good to see PPDAI Group has been growing its earnings per share at 64% a year over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly - an ideal combination.
We'd also point out that PPDAI Group issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
To summarise, shareholders should always check that PPDAI Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that PPDAI Group has a low and conservative payout ratio. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. PPDAI Group has a number of positive attributes, but falls short of our ideal dividend company. It may be worth a look at the right price, though.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 PPDAI Group analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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If you spot an error that warrants correction, please contact the editor at email@example.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.