Could Vinyl Chemicals (India) Limited (NSE:VINYLINDIA) Have The Makings Of Another Dividend Aristocrat?

Today we'll take a closer look at Vinyl Chemicals (India) Limited (NSE:VINYLINDIA) 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 2.1% yield is nothing to get excited about, but investors probably think the long payment history suggests Vinyl Chemicals (India) has some staying power. Some simple research can reduce the risk of buying Vinyl Chemicals (India) for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. Vinyl Chemicals (India) paid out 57% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Vinyl Chemicals (India) paid out a conservative 32% of its free cash flow as dividends last year. 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, Vinyl Chemicals (India) investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Vinyl Chemicals (India) every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. For the purpose of this article, we only scrutinise the last decade of Vinyl Chemicals (India)'s dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was ₹0.1 in 2011, compared to ₹2.4 last year. This works out to be a compound annual growth rate (CAGR) of approximately 36% a year over that time.

With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.

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. While there may be fluctuations in the past , Vinyl Chemicals (India)'s 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. Growth of 1.1% is relatively anaemic growth, which we wonder about. When a business is not growing, it often makes more sense to pay higher dividends to shareholders rather than retain the cash with no way to utilise it.

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. First, we think Vinyl Chemicals (India) has an acceptable payout ratio and its dividend is well covered by cashflow. Second, earnings growth is pretty limited, but at least the dividends have been relatively stable. Overall we think Vinyl Chemicals (India) is an interesting dividend stock, although it could be better.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, Vinyl Chemicals (India) has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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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