Could Mindteck (India) Limited (NSE:MINDTECK) 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. 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 a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Mindteck (India) is a new dividend aristocrat in the making. We’d agree the yield does look enticing. Some simple analysis can reduce the risk of holding Mindteck (India) for its dividend, and we’ll focus on the most important aspects below.
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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 926% of Mindteck (India)’s profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 99%, Mindteck (India)’s dividend payments are poorly covered by cash flow. As Mindteck (India)’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
With a strong net cash balance, Mindteck (India) investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Mindteck (India)’s latest financial position, by checking our visualisation of its financial health.
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. Mindteck (India) has been paying a dividend for the past five years. Its most recent annual dividend was ₹1.00 per share, effectively flat on its first payment five years ago.
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
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. Over the past five years, it looks as though Mindteck (India)’s EPS have declined at around 57% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Mindteck (India)’s earnings per share, which support the dividend, have been anything but stable.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We’re a bit uncomfortable with Mindteck (India) paying out a high percentage of both its cashflow and earnings. Second, earnings per share have been in decline, and the dividend history is shorter than we’d like. In this analysis, Mindteck (India) doesn’t shape up too well as a dividend stock. We’d find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.
Now, if you want to look closer, it would be worth checking out our free research on Mindteck (India) management tenure, salary, and performance.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
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