Know This Before Buying Mangalore Refinery and Petrochemicals Limited (NSE:MRPL) For Its Dividend

Is Mangalore Refinery and Petrochemicals Limited (NSE:MRPL) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 Mangalore Refinery and Petrochemicals's financial health here.

While Mangalore Refinery and Petrochemicals's 2.1% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple analysis can reduce the risk of holding Mangalore Refinery and Petrochemicals for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Mangalore Refinery and Petrochemicals!

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While Mangalore Refinery and Petrochemicals pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Mangalore Refinery and Petrochemicals paid out 227% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term.

Is Mangalore Refinery and Petrochemicals's Balance Sheet Risky?

Given Mangalore Refinery and Petrochemicals is paying a dividend but reported a loss over the past year, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Mangalore Refinery and Petrochemicals has net debt of 12.08 times its EBITDA, which we think carries substantial risk if earnings aren't sustainable.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Mangalore Refinery and Petrochemicals has interest cover of less than 1 - which suggests its earnings are not high enough to cover even the interest payments on its debt. This is potentially quite serious, and we would likely avoid the stock if it were not resolved quickly. Low interest cover and high debt can create problems right when the investor least needs them, and we're reluctant to rely on the dividend of companies with these traits.

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. For the purpose of this article, we only scrutinise the last decade of Mangalore Refinery and Petrochemicals's dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was ₹1.20 in 2009, compared to ₹1.00 last year. The dividend has shrunk at around 1.8% a year during that period. Mangalore Refinery and Petrochemicals's dividend hasn't shrunk linearly at 1.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Mangalore Refinery and Petrochemicals for its dividend, given that payments have shrunk over the past ten years.

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. It's good to see Mangalore Refinery and Petrochemicals has been growing its earnings per share at 21% a year over the past five years.

We'd also point out that Mangalore Refinery and Petrochemicals issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

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 Mangalore Refinery and Petrochemicals paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. With this information in mind, we think Mangalore Refinery and Petrochemicals may not be an ideal dividend stock.

Are management backing themselves to deliver performance? Check their shareholdings in Mangalore Refinery and Petrochemicals in our latest insider ownership analysis.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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 editorial-team@simplywallst.com. 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.