Key Things To Consider Before Buying Bayer CropScience Limited (NSE:BAYERCROP) For Its Dividend

Today we'll take a closer look at Bayer CropScience Limited (NSE:BAYERCROP) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

A 1.7% yield is nothing to get excited about, but investors probably think the long payment history suggests Bayer CropScience has some staying power. Some simple analysis can reduce the risk of holding Bayer CropScience for its dividend, and we'll focus on the most important aspects below.

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Bayer CropScience paid out 24% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Bayer CropScience's cash payout ratio last year was 8.8%. 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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Bayer CropScience's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Bayer CropScience's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Bayer CropScience's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was ₹4.0 in 2011, compared to ₹90.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 37% a year over that time.

Dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown at around 2.7% a year for the past five years, which is better than seeing them shrink! So, we know earnings growth has been thin on the ground. However, at least the payout ratio is conservative, and there is plenty of potential to increase this over time.

Conclusion

To summarise, shareholders should always check that Bayer CropScience's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Bayer CropScience is paying out a low percentage of its earnings and cash flow. Second, earnings growth has been mediocre, but at least the dividends have been relatively stable. Overall we think Bayer CropScience scores well on our analysis. It's not quite perfect, but we'd definitely be keen to take a closer look.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. See if management have their own wealth at stake, by checking insider shareholdings in Bayer CropScience stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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