Today we’ll take a closer look at Hindustan Aeronautics Limited (NSE:HAL) 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. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, Hindustan Aeronautics pays a decent-sized 3.7% dividend yield, and has been distributing cash to shareholders for the past two years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. The company also returned around 5.7% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple research can reduce the risk of buying Hindustan Aeronautics for its dividend – read on to learn more.
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. 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. Hindustan Aeronautics paid out 23% of its profit as dividends, over the trailing twelve month period. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Hindustan Aeronautics paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
We update our data on Hindustan Aeronautics every 24 hours, so you can always get our latest analysis of its financial health, here.
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. The company has been paying a stable dividend for a few years now, but we’d like to see more evidence of consistency over a longer period. During the past two-year period, the first annual payment was ₹8.25 in 2018, compared to ₹19.80 last year. This works out to be a compound annual growth rate (CAGR) of approximately 55% a year over that time.
The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.
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. Earnings have grown at around 8.6% a year for the past five years, which is better than seeing them shrink! A low payout ratio and strong historical earnings growth suggests Hindustan Aeronautics has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.
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, the company has a conservative payout ratio, although we’d note that its cashflow in the past year was substantially lower than its reported profit. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. In sum, we find it hard to get excited about Hindustan Aeronautics from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Case in point: We’ve spotted 3 warning signs for Hindustan Aeronautics (of which 1 is significant!) you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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