Are You An Income Investor? Don't Miss Out On Associated Alcohols & Breweries Limited (NSE:ASALCBR)

Could Associated Alcohols & Breweries Limited (NSE:ASALCBR) 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.

Investors might not know much about Associated Alcohols & Breweries's dividend prospects, even though it has been paying dividends for the last five years and offers a 0.4% yield. While the yield may not look too great, the relatively long payment history is interesting. Some simple analysis can reduce the risk of holding Associated Alcohols & Breweries for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Associated Alcohols & Breweries!

Payout ratios

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. Looking at the data, we can see that 4.3% of Associated Alcohols & Breweries' profits were paid out as dividends in the last 12 months. We'd say its dividends are thoroughly covered by earnings.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Associated Alcohols & Breweries' cash payout ratio last year was 4.4%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Associated Alcohols & Breweries' 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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Associated Alcohols & Breweries' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Associated Alcohols & Breweries' 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. Associated Alcohols & Breweries has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₹0.3 in 2015, compared to ₹1.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time.

Associated Alcohols & Breweries has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

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 Associated Alcohols & Breweries has grown its earnings per share at 28% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.

Conclusion

To summarise, shareholders should always check that Associated Alcohols & Breweries' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Overall we think Associated Alcohols & Breweries scores well on our analysis. It's not quite perfect, but we'd definitely be keen to take a closer look.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Associated Alcohols & Breweries that investors need to be conscious of moving forward.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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