Is K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) A Good Dividend Stock?

Dividend paying stocks like K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 0.7% yield is nothing to get excited about, but investors probably think the long payment history suggests K.C.P. Sugar and Industries has some staying power. Some simple analysis can reduce the risk of holding K.C.P. Sugar and Industries for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on K.C.P. Sugar and Industries!

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 597% of K.C.P. Sugar and Industries' profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. K.C.P. Sugar and Industries' cash payout ratio last year was 6.3%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and K.C.P. Sugar and Industries fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Remember, you can always get a snapshot of K.C.P. Sugar and Industries' latest financial position, by checking our visualisation of its financial health.

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. K.C.P. Sugar and Industries has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was ₹0.8 in 2010, compared to ₹0.1 last year. This works out to a decline of approximately 87% over that time.

We struggle to make a case for buying K.C.P. Sugar and Industries for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. K.C.P. Sugar and Industries' earnings per share have shrunk at 31% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and K.C.P. Sugar and Industries' earnings per share, which support the dividend, have been anything but stable.

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. We're not keen on the fact that K.C.P. Sugar and Industries paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, K.C.P. Sugar and Industries has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

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. Just as an example, we've come accross 4 warning signs for K.C.P. Sugar and Industries you should be aware of, and 1 of them is significant.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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