Dividend paying stocks like Finolex Cables Limited (NSE:FINCABLES) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
One way to look into the risks is to look at a snapshot of Finolex Cables’s latest financial position, by checking our visualisation of its financial health.
While Finolex Cables’s 1.2% dividend yield is not the highest, we think its lengthy payment history is quite interesting. There are a few simple ways to reduce the risks of buying Finolex Cables for its dividend, and we’ll go through these 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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Finolex Cables paid out 18% of its profit as dividends. 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. The company paid out 55% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Finolex Cables has available to meet other needs. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
With a strong net cash balance, Finolex Cables investors may not have much to worry about in the near term from a dividend perspective.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Finolex Cables has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was ₹0.20 in 2009, compared to ₹4.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 37% a year over that time.
It’s rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Finolex Cables has done it, which we really like.
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 Finolex Cables has grown its earnings per share at 13% per annum over the past five years. Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Finolex Cables pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Overall we think Finolex Cables scores well on our analysis. It’s not quite perfect, but we’d definitely be keen to take a closer look.
See if management have their own wealth at stake, by checking insider shareholdings in Finolex Cables stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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 firstname.lastname@example.org. 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.