What To Know Before Buying Gokul Refoils & Solvent Limited (NSE:GOKUL) For Its Dividend

Is Gokul Refoils & Solvent Limited (NSE:GOKUL) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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, Gokul Refoils & Solvent likely looks attractive to investors, given its 10.0% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Remember though, due to the recent spike in its share price, Gokul Refoils & Solvent's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Gokul Refoils & Solvent!

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. Gokul Refoils & Solvent paid out 116% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Consider getting our latest analysis on Gokul Refoils & Solvent's financial position here.

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. For the purpose of this article, we only scrutinise the last decade of Gokul Refoils & Solvent's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was ₹0.3 in 2011, compared to ₹2.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 21% a year over that time. The dividends haven't grown at precisely 21% every year, but this is a useful way to average out the historical rate of growth.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in 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 Gokul Refoils & Solvent has grown its earnings per share at 15% per annum over the past five years. With a payout ratio of 116%, Gokul Refoils & Solvent is paying out dividends substantially greater than what it earned in profit.

Conclusion

To summarise, shareholders should always check that Gokul Refoils & Solvent's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Gokul Refoils & Solvent is paying out a larger percentage of its profit than we're comfortable with. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, we're unenthused by Gokul Refoils & Solvent as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. To that end, Gokul Refoils & Solvent has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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