Should You Buy Sutlej Textiles and Industries Limited (NSE:SUTLEJTEX) For Its Dividend?

Is Sutlej Textiles and Industries Limited (NSE:SUTLEJTEX) 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 1.1% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Sutlej Textiles and Industries could have potential. Some simple analysis can reduce the risk of holding Sutlej Textiles and Industries for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Sutlej Textiles and Industries!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While Sutlej Textiles and Industries pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Last year, Sutlej Textiles and Industries paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

Consider getting our latest analysis on Sutlej Textiles and Industries' financial position here.

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 Sutlej Textiles and Industries' dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was ₹0.2 in 2010, compared to ₹0.3 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.1% a year over that time. The dividends haven't grown at precisely 6.1% every year, but this is a useful way to average out the historical rate of growth.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

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. Sutlej Textiles and Industries' earnings per share have shrunk at 35% 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 Sutlej Textiles and Industries' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Sutlej Textiles and Industries' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Sutlej Textiles and Industries' dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share are down, and Sutlej Textiles and Industries' dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Sutlej Textiles and Industries from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Sutlej Textiles and Industries has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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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