Could Elgi Rubber Company Limited (NSE:ELGIRUBCO) Have The Makings Of Another Dividend Aristocrat?

Is Elgi Rubber Company Limited (NSE:ELGIRUBCO) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

Investors might not know much about Elgi Rubber's dividend prospects, even though it has been paying dividends for the last nine years and offers a 0.6% yield. A 0.6% yield is not inspiring, but the longer payment history has some appeal. Some simple analysis can reduce the risk of holding Elgi Rubber for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Elgi Rubber!

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although it reported a loss over the past 12 months, Elgi Rubber currently pays a dividend. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

Elgi Rubber's cash payout ratio last year was 3.2%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.

Consider getting our latest analysis on Elgi Rubber's financial position here.

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. Looking at the last decade of data, we can see that Elgi Rubber paid its first dividend at least nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was ₹0.5 in 2012, compared to ₹0.2 last year. The dividend has fallen 68% over that period.

A shrinking dividend over a nine-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Elgi Rubber's earnings per share have shrunk at 16% 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 Elgi Rubber's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Elgi Rubber's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Elgi Rubber is paying out a low percentage of its earnings and cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Ultimately, Elgi Rubber comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 4 warning signs for Elgi Rubber (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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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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