Should You Buy Lakshmi Finance & Industrial Corporation Limited (NSE:LFIC) For Its 2.7% Dividend?

Dividend paying stocks like Lakshmi Finance & Industrial Corporation Limited (NSE:LFIC) 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. 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.

Investors might not know much about Lakshmi Finance & Industrial's dividend prospects, even though it has been paying dividends for the last nine years and offers a 2.7% yield. A 2.7% yield is not inspiring, but the longer payment history has some appeal. Some simple analysis can reduce the risk of holding Lakshmi Finance & Industrial for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Lakshmi Finance & Industrial!

Payout ratios

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. Although Lakshmi Finance & Industrial pays a dividend, it was loss-making during the past year. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

We update our data on Lakshmi Finance & Industrial every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. Looking at the last decade of data, we can see that Lakshmi Finance & Industrial paid its first dividend at least nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was ₹2.5 in 2012, compared to ₹2.0 last year. The dividend has shrunk at around 2.4% a year during that period. Lakshmi Finance & Industrial's dividend has been cut sharply at least once, so it hasn't fallen by 2.4% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

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. Over the past five years, it looks as though Lakshmi Finance & Industrial's EPS have declined at around 39% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Lakshmi Finance & Industrial's earnings per share, which support the dividend, have been anything but stable.

Conclusion

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 a bit uncomfortable with it paying a dividend while reporting a loss over the past year. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. With any dividend stock, we look for a sustainable payout ratio, steady dividends, and growing earnings. Lakshmi Finance & Industrial has a few too many issues for us to get interested.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. To that end, Lakshmi Finance & Industrial has 4 warning signs (and 2 which can't be ignored) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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