IOL Chemicals and Pharmaceuticals (NSE:IOLCP) Could Be A Buy For Its Upcoming Dividend

IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) stock is about to trade ex-dividend in 3 days. Ex-dividend means that investors that purchase the stock on or after the 17th of November will not receive this dividend, which will be paid on the 5th of December.

The upcoming dividend for IOL Chemicals and Pharmaceuticals is ₹4.00 per share, increased from last year's total dividends per share of ₹3.00. If you buy this business for its dividend, you should have an idea of whether IOL Chemicals and Pharmaceuticals's dividend is reliable and sustainable. So we need to investigate whether IOL Chemicals and Pharmaceuticals can afford its dividend, and if the dividend could grow.

View our latest analysis for IOL Chemicals and Pharmaceuticals

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. IOL Chemicals and Pharmaceuticals is paying out just 9.1% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 5.9% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that IOL Chemicals and Pharmaceuticals'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.

Click here to see how much of its profit IOL Chemicals and Pharmaceuticals paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see IOL Chemicals and Pharmaceuticals has grown its earnings rapidly, up 75% a year for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, IOL Chemicals and Pharmaceuticals looks like a promising growth company.

Unfortunately IOL Chemicals and Pharmaceuticals has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

To Sum It Up

Has IOL Chemicals and Pharmaceuticals got what it takes to maintain its dividend payments? We love that IOL Chemicals and Pharmaceuticals is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. There's a lot to like about IOL Chemicals and Pharmaceuticals, and we would prioritise taking a closer look at it.

So while IOL Chemicals and Pharmaceuticals looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, IOL Chemicals and Pharmaceuticals has 4 warning signs (and 1 which can't be ignored) we think you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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