Could Mahindra EPC Irrigation Limited (NSE:MAHEPC) Have The Makings Of Another Dividend Aristocrat?

Today we'll take a closer look at Mahindra EPC Irrigation Limited (NSE:MAHEPC) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

With only a two-year payment history, and a 0.8% yield, investors probably think Mahindra EPC Irrigation is not much of a dividend stock. Many of the best dividend stocks typically start out paying a low yield, so we wouldn't automatically cut it from our list of prospects. Remember though, due to the recent spike in its share price, Mahindra EPC Irrigation's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Mahindra EPC Irrigation!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 14% of Mahindra EPC Irrigation's profits were paid out as dividends in the last 12 months. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Mahindra EPC Irrigation paid out 50% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's positive to see that Mahindra EPC Irrigation'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 Mahindra EPC Irrigation 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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past two-year period, the first annual payment was ₹0.5 in 2018, compared to ₹1.2 last year. Dividends per share have grown at approximately 55% per year over this time.

We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. It's good to see Mahindra EPC Irrigation has been growing its earnings per share at 68% a year 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

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. Firstly, we like that Mahindra EPC Irrigation pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Mahindra EPC Irrigation has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for Mahindra EPC Irrigation that investors should know about before committing capital to this stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

If you’re looking to trade Mahindra EPC Irrigation, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.