Should You Buy Chemring Group PLC (LON:CHG) For Its Dividend?

A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Historically, Chemring Group PLC (LON:CHG) has been paying a dividend to shareholders. Today it yields 2.1%. Should it have a place in your portfolio? Let’s take a look at Chemring Group in more detail.

See our latest analysis for Chemring Group

How I analyze a dividend stock

If you are a dividend investor, you should always assess these five key metrics:

• Does it pay an annual yield higher than 75% of dividend payers?

• Has it paid dividend every year without dramatically reducing payout in the past?

• Has dividend per share amount increased over the past?

• Is its earnings sufficient to payout dividend at the current rate?

• Will it have the ability to keep paying its dividends going forward?

LSE:CHG Historical Dividend Yield, March 7th 2019

How does Chemring Group fare?

The current payout ratio for CHG is negative, which is not great.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Dividend payments from Chemring Group have been volatile in the past 10 years, with some years experiencing significant drops of over 25%. This means that dividend hunters should probably steer clear of the stock, at least for now until the track record improves.

Compared to its peers, Chemring Group generates a yield of 2.1%, which is on the low-side for Aerospace & Defense stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Chemring Group for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. There are three essential factors you should further examine:

1. Future Outlook: What are well-informed industry analysts predicting for CHG’s future growth? Take a look at our free research report of analyst consensus for CHG’s outlook.

2. Valuation: What is CHG worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CHG is currently mispriced by the market.

3. Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

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.