Three Things You Should Check Before Buying Ganesha Ecosphere Limited (NSE:GANECOS) For Its Dividend

Is Ganesha Ecosphere Limited (NSE:GANECOS) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A slim 0.6% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Ganesha Ecosphere could have potential. Remember though, due to the recent spike in its share price, Ganesha Ecosphere's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple analysis can reduce the risk of holding Ganesha Ecosphere for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Ganesha Ecosphere!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 12% of Ganesha Ecosphere's profits were paid out as dividends in the last 12 months. We'd say its dividends are thoroughly covered by earnings.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Ganesha Ecosphere pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

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

We update our data on Ganesha Ecosphere every 24 hours, so you can always get our latest analysis of its financial health, 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. For the purpose of this article, we only scrutinise the last decade of Ganesha Ecosphere's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was ₹1.0 in 2010, compared to ₹2.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.2% a year over that time.

Businesses that can grow their dividends at a decent rate and maintain a stable payout can generate substantial wealth for shareholders over the long term.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Earnings have grown at around 9.6% a year for the past five years, which is better than seeing them shrink! With a decent amount of growth and a low payout ratio, we think this bodes well for Ganesha Ecosphere's prospects of growing its dividend payments in the future.

Conclusion

To summarise, shareholders should always check that Ganesha Ecosphere's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, the company has a conservative payout ratio, although we'd note that its cashflow in the past year was substantially lower than its reported profit. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Overall we think Ganesha Ecosphere 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Ganesha Ecosphere that investors need to be conscious of moving forward.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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