United Drilling Tools (NSE:UNIDT) Is Paying Out A Dividend Of ₹0.60

United Drilling Tools Limited (NSE:UNIDT) will pay a dividend of ₹0.60 on the 10th of March. This makes the dividend yield 0.7%, which will augment investor returns quite nicely.

Check out our latest analysis for United Drilling Tools

United Drilling Tools' Payment Has Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, United Drilling Tools was earning enough to cover the dividend, but it wasn't generating any free cash flows. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Unless the company can turn things around, EPS could fall by 17.4% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 55%, which we are pretty comfortable with and we think is feasible on an earnings basis.

United Drilling Tools' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 7 years was ₹0.60 in 2017, and the most recent fiscal year payment was ₹1.80. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth Potential Is Shaky

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Over the past five years, it looks as though United Drilling Tools' EPS has declined at around 17% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.

United Drilling Tools' Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, United Drilling Tools has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Is United Drilling Tools not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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