Andhra Sugars' (NSE:ANDHRSUGAR) Shareholders Will Receive A Smaller Dividend Than Last Year

The Andhra Sugars Limited (NSE:ANDHRSUGAR) has announced it will be reducing its dividend payable on the 26th of October to ₹4.00. The dividend yield of 2.9% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Andhra Sugars

Andhra Sugars' Earnings Easily Cover the Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Andhra Sugars was paying a whopping 132% as a dividend, but this only made up 22% of its overall earnings. A cash payout ratio this high could put the dividend under pressure and force the company to reduce it in the future if it were to run into tough times.

Looking forward, EPS could fall by 0.05% if the company can't turn things around from the last few years. If the dividend continues along recent trends, we estimate the payout ratio could be 52%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from ₹1.10 in 2012 to the most recent annual payment of ₹4.00. This means that it has been growing its distributions at 14% per annum over that time. Andhra Sugars has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Andhra Sugars May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. However, Andhra Sugars' EPS was effectively flat over the past five years, which could stop the company from paying more every year.

We'd also point out that Andhra Sugars has issued stock equal to 100% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Andhra Sugars' Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Andhra Sugars is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 3 warning signs for Andhra Sugars you should be aware of, and 1 of them doesn't sit too well with us. 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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