The Attractive Combination That Could Earn Associated Alcohols & Breweries Limited (NSE:ASALCBR) A Place In Your Dividend Portfolio

Could Associated Alcohols & Breweries Limited (NSE:ASALCBR) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a 0.3% yield and a five-year payment history, investors probably think Associated Alcohols & Breweries looks like a reliable dividend stock. A 0.3% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying Associated Alcohols & Breweries for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. Associated Alcohols & Breweries paid out 4.1% of its profit as dividends, over the trailing twelve month period. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Associated Alcohols & Breweries paid out 6.6% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that Associated Alcohols & Breweries' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note Associated Alcohols & Breweries' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Associated Alcohols & Breweries' latest financial position, by checking our visualisation of its financial health.

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 data, we can see that Associated Alcohols & Breweries has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₹0.3 in 2016, compared to ₹1.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time.

Associated Alcohols & Breweries has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Associated Alcohols & Breweries has grown its earnings per share at 32% per annum over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly - an ideal combination.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Associated Alcohols & Breweries has low and conservative payout ratios. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. All things considered, Associated Alcohols & Breweries looks like a strong prospect. At the right valuation, it could be something special.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Associated Alcohols & Breweries that investors should know about before committing capital to this stock.

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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