Here's How We Evaluate ICICI Prudential Life Insurance Company Limited's (NSE:ICICIPRULI) Dividend

Dividend paying stocks like ICICI Prudential Life Insurance Company Limited (NSE:ICICIPRULI) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Investors might not know much about ICICI Prudential Life Insurance's dividend prospects, even though it has been paying dividends for the last five years and offers a 0.4% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. 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.

Click the interactive chart for our full dividend analysis

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. 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. ICICI Prudential Life Insurance paid out 30% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Consider getting our latest analysis on ICICI Prudential Life Insurance'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. ICICI Prudential Life Insurance has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₹2.2 in 2016, compared to ₹2.0 last year. The dividend has shrunk at around 1.9% a year during that period. ICICI Prudential Life Insurance's dividend has been cut sharply at least once, so it hasn't fallen by 1.9% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying ICICI Prudential Life Insurance for its dividend, given that payments have shrunk over the past five years.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though ICICI Prudential Life Insurance's EPS have declined at around 10% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and ICICI Prudential Life Insurance's earnings per share, which support the dividend, have been anything but stable.

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. We're glad to see ICICI Prudential Life Insurance has a low payout ratio, as this suggests earnings are being reinvested in the business. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In summary, we're unenthused by ICICI Prudential Life Insurance 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for ICICI Prudential Life Insurance that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you’re looking to trade ICICI Prudential Life Insurance, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.