Is MITCON Consultancy & Engineering Services Limited (NSE:MITCON) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. Unfortunately, one common occurrence with dividend companies is for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Some readers mightn’t know much about MITCON Consultancy & Engineering Services’s 2.0% dividend, as it has only been paying distributions for the last two years. Many of the best dividend stocks typically start out paying a low yield, so we wouldn’t automatically cut it from our list of prospects. Some simple analysis can offer a lot of insight when buying a company for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. While MITCON Consultancy & Engineering Services pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
As a loss-making company, we can also measure MITCON Consultancy & Engineering Services’s dividend payments against its levered free cash flow, to see if enough cash was generated to cover the dividend. MITCON Consultancy & Engineering Services’s cash payout ratio last year was 23%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.
While the above analysis focuses on dividends relative to a company’s earnings, we do note MITCON Consultancy & Engineering Services’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
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. The company has been paying a stable dividend for a few years now, but we’d like to see more evidence of consistency over a longer period. Its most recent annual dividend was ₹1.00 per share, effectively flat on its first payment two years ago.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. MITCON Consultancy & Engineering Services’s earnings per share have fallen -105% over the past year. This is a pretty serious concern, and it would be worth investigating whether something fundamental in the business has changed – or broken. We do note though, one year is too short a time to be drawing strong conclusions about a company’s future growth prospects.
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 MITCON Consultancy & Engineering Services paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and to our mind MITCON Consultancy & Engineering Services has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In summary, MITCON Consultancy & Engineering Services has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are likely a number of more attractive alternatives out there.
Now, if you want to look closer, it would be worth checking out our free research on MITCON Consultancy & Engineering Services management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.