Dividend paying stocks like Indo Count Industries Limited (NSE:ICIL) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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.
So you might want to consider getting our latest analysis on Indo Count Industries's financial health here.
Investors might not know much about Indo Count Industries's dividend prospects, even though it has been paying dividends for the last four years and offers a 1.4% yield. While the yield may not look too great, the relatively long payment history is interesting. That said, the recent jump in the share price will make Indo Count Industries's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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. In the last year, Indo Count Industries paid out 18% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Indo Count Industries's cash payout ratio last year was 5.1%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Indo Count Industries's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. Indo Count Industries has been paying a dividend for the past four years. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past four-year period, the first annual payment was ₹0.40 in 2015, compared to ₹0.60 last year. Dividends per share have grown at approximately 11% per year over this time. The dividends haven't grown at precisely 11% every year, but this is a useful way to average out the historical rate of growth.
It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Indo Count Industries's earnings per share have shrunk at 12% 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 Indo Count Industries's earnings per share, which support the dividend, have been anything but stable.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Indo Count Industries has low and conservative payout ratios. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Ultimately, Indo Count Industries 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.
See if management have their own wealth at stake, by checking insider shareholdings in Indo Count Industries stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 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 firstname.lastname@example.org. 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.