Could Linc Pen & Plastics Limited (NSE:LINCPEN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
While Linc Pen & Plastics's 0.7% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
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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 15% of Linc Pen & Plastics's profits were paid out as dividends in the last 12 months. We'd say its dividends are thoroughly covered by earnings.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Linc Pen & Plastics paid out 10% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. 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.
Remember, you can always get a snapshot of Linc Pen & Plastics's 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. For the purpose of this article, we only scrutinise the last decade of Linc Pen & Plastics's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. Its most recent annual dividend was ₹1.50 per share, effectively flat on its first payment ten years ago.
We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Linc Pen & Plastics has grown its earnings per share at 5.3% per annum over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Linc Pen & Plastics's prospects of growing its dividend payments in the future.
Conclusion
To summarise, shareholders should always check that Linc Pen & Plastics's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Linc Pen & Plastics has low and conservative payout ratios. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Linc Pen & Plastics has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Are management backing themselves to deliver performance? Check their shareholdings in Linc Pen & Plastics in our latest insider ownership analysis.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.