Is Clariant Chemicals (India) Limited's (NSE:CLNINDIA) 2.9% Dividend Worth Your Time?

Dividend paying stocks like Clariant Chemicals (India) Limited (NSE:CLNINDIA) 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.

A 2.9% yield is nothing to get excited about, but investors probably think the long payment history suggests Clariant Chemicals (India) has some staying power. 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.

Explore this interactive chart for our latest analysis on Clariant Chemicals (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, Clariant Chemicals (India) paid out 13% 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. Clariant Chemicals (India)'s cash payout ratio in the last year was 32%, which suggests dividends were well covered by cash generated by the business. It's positive to see that Clariant Chemicals (India)'s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Consider getting our latest analysis on Clariant Chemicals (India)'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 Clariant Chemicals (India)'s dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was ₹30.0 in 2011, compared to ₹11.0 last year. This works out to be a decline of approximately 9.5% per year over that time. Clariant Chemicals (India)'s dividend has been cut sharply at least once, so it hasn't fallen by 9.5% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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 Clariant Chemicals (India)'s EPS have declined at around 23% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Clariant Chemicals (India)'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. 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 Clariant Chemicals (India)'s dividend has been cut at least once in the past, which is disappointing. Ultimately, Clariant Chemicals (India) comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

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. Just as an example, we've come accross 3 warning signs for Clariant Chemicals (India) you should be aware of, and 2 of them make us uncomfortable.

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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