Does Lumax Auto Technologies Limited (NSE:LUMAXTECH) Have A Place In Your Dividend Portfolio?

Today we'll take a closer look at Lumax Auto Technologies Limited (NSE:LUMAXTECH) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A slim 1.4% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Lumax Auto Technologies could have potential. Some simple analysis can reduce the risk of holding Lumax Auto Technologies for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Lumax Auto Technologies!

Payout ratios

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. Looking at the data, we can see that 21% of Lumax Auto Technologies' 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.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Lumax Auto Technologies paid out 57% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's positive to see that Lumax Auto Technologies' 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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Lumax Auto Technologies' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Lumax Auto Technologies' latest financial position, by checking our visualisation of its financial health.

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. For the purpose of this article, we only scrutinise the last decade of Lumax Auto Technologies' dividend 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 ₹1.2 in 2011, compared to ₹2.0 last year. Dividends per share have grown at approximately 5.2% per year over this time. Lumax Auto Technologies' dividend payments have fluctuated, so it hasn't grown 5.2% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. While there may be fluctuations in the past , Lumax Auto Technologies' earnings per share have basically not grown from where they were five years ago. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. So, we know earnings growth has been thin on the ground. However, the payout ratio is low, and some companies can deliver adequate dividend performance simply by increasing the payout ratio.

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. Above all, we're glad to see that Lumax Auto Technologies pays out a low fraction of its earnings and, while it paid a higher percentage of cashflow, this also was within a normal range. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. In sum, we find it hard to get excited about Lumax Auto Technologies 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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Lumax Auto Technologies that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you’re looking to trade Lumax Auto Technologies, 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 (at) simplywallst.com.