Three Things You Should Check Before Buying AksharChem (India) Limited (NSE:AKSHARCHEM) For Its Dividend

Is AksharChem (India) Limited (NSE:AKSHARCHEM) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 1.7% yield and a seven-year payment history, investors probably think AksharChem (India) looks like a reliable dividend stock. A 1.7% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying AksharChem (India) for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on AksharChem (India)!

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. In the last year, AksharChem (India) paid out 25% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Of the free cash flow it generated last year, AksharChem (India) paid out 32% as dividends, suggesting the dividend is affordable. 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.

With a strong net cash balance, AksharChem (India) investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of AksharChem (India)'s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. AksharChem (India) has been paying a dividend for the past seven years. It's good to see that AksharChem (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 seven-year period, the first annual payment was ₹0.5 in 2013, compared to ₹3.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time. The dividends haven't grown at precisely 32% every year, but this is a useful way to average out the historical rate of growth.

AksharChem (India) has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

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? It's not great to see that AksharChem (India)'s have fallen at approximately 8.4% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

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 AksharChem (India) has low and conservative payout ratios. Earnings per share are down, and AksharChem (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 AksharChem (India) out there.

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. For example, we've identified 3 warning signs for AksharChem (India) (1 doesn't sit too well with us!) 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%.

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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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