Why DCM Shriram Limited (NSE:DCMSHRIRAM) Should Be In Your Dividend Portfolio

Is DCM Shriram Limited (NSE:DCMSHRIRAM) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A slim 1.3% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, DCM Shriram could have potential. That said, the recent jump in the share price will make DCM Shriram's dividend yield look smaller, even though the company prospects could be improving. 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.

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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. Looking at the data, we can see that 13% of DCM Shriram's profits were paid out as dividends in the last 12 months. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. DCM Shriram's cash payout ratio last year was 5.3%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that DCM Shriram'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, DCM Shriram investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on DCM Shriram's financial position here.

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. DCM Shriram has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was ₹0.4 in 2011, compared to ₹9.7 last year. Dividends per share have grown at approximately 38% per year over this time. The dividends haven't grown at precisely 38% every year, but this is a useful way to average out the historical rate of growth.

DCM Shriram 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

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. It's good to see DCM Shriram has been growing its earnings per share at 18% a year over the past five years. Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Conclusion

To summarise, shareholders should always check that DCM Shriram's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that DCM Shriram has low and conservative payout ratios. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Overall we think DCM Shriram scores well on our analysis. It's not quite perfect, but we'd definitely be keen to take a closer look.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 3 warning signs for DCM Shriram that investors should take into consideration.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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