Key Things To Watch Out For If You Are After ICICI Securities Limited's (NSE:ISEC) 3.6% Dividend

Today we'll take a closer look at ICICI Securities Limited (NSE:ISEC) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, ICICI Securities pays a decent-sized 3.6% dividend yield, and has been distributing cash to shareholders for the past three years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple research can reduce the risk of buying ICICI Securities for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. Looking at the data, we can see that 53% of ICICI Securities' profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Remember, you can always get a snapshot of ICICI Securities' 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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past three-year period, the first annual payment was ₹7.8 in 2018, compared to ₹14.8 last year. Dividends per share have grown at approximately 24% per year over this time. ICICI Securities' dividend payments have fluctuated, so it hasn't grown 24% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see ICICI Securities has grown its earnings per share at 30% per annum over the past five years. With recent, rapid earnings per share growth and a payout ratio of 53%, this business looks like an interesting prospect if earnings are reinvested effectively.

Conclusion

To summarise, shareholders should always check that ICICI Securities' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think ICICI Securities has an acceptable payout ratio. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. ICICI Securities might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come accross 3 warning signs for ICICI Securities you should be aware of, and 1 of them is concerning.

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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