Three Things You Should Check Before Buying SKM Egg Products Export (India) Limited (NSE:SKMEGGPROD) For Its Dividend

Could SKM Egg Products Export (India) Limited (NSE:SKMEGGPROD) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a 0.9% yield and a six-year payment history, investors probably think SKM Egg Products Export (India) looks like a reliable dividend stock. A 0.9% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying SKM Egg Products Export (India) 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. 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. SKM Egg Products Export (India) paid out 13% of its profit as dividends, over the trailing twelve month period. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. SKM Egg Products Export (India)'s cash payout ratio last year was 5.7%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

We update our data on SKM Egg Products Export (India) every 24 hours, so you can always get our latest analysis of its financial health, 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. SKM Egg Products Export (India) has been paying a dividend for the past six years. It's good to see that SKM Egg Products Export (India) has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was ₹1.0 in 2015, compared to ₹0.5 last year. This works out to a decline of approximately 50% over that time.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though SKM Egg Products Export (India)'s EPS have declined at around 16% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and SKM Egg Products Export (India)'s earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that SKM Egg Products Export (India)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Earnings per share are down, and SKM Egg Products Export (India)'s dividend has been cut at least once in the past, which is disappointing. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than SKM Egg Products Export (India) out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for SKM Egg Products Export (India) (of which 1 makes us a bit uncomfortable!) you should know about.

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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