Heritage Foods (NSE:HERITGFOOD) Is Reducing Its Dividend To ₹2.50

Heritage Foods Limited (NSE:HERITGFOOD) is reducing its dividend to ₹2.50 on the 4th of August. The dividend yield of 1.8% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Heritage Foods

Heritage Foods' Earnings Easily Cover the Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. However, prior to this announcement, Heritage Foods' dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.

Looking forward, earnings per share is forecast to rise by 43.0% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 21%, which is in the range that makes us comfortable with the sustainability of the dividend.

Heritage Foods Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was ₹0.30 in 2012, and the most recent fiscal year payment was ₹5.00. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

The Dividend Has Limited Growth Potential

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. Heritage Foods' earnings per share has shrunk at 19% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

Our Thoughts On Heritage Foods' Dividend

Overall, while it's not great to see that the dividend has been cut, we think the company is now in a good position to make consistent payments going into the future. With shrinking earnings, the company may see some issues maintaining the dividend even though they look pretty sustainable for now. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.

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. For instance, we've picked out 2 warning signs for Heritage Foods that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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