Deepak Fertilisers And Petrochemicals' (NSE:DEEPAKFERT) Shareholders Will Receive A Smaller Dividend Than Last Year

Deepak Fertilisers And Petrochemicals Corporation Limited (NSE:DEEPAKFERT) has announced that on 10th of October, it will be paying a dividend of₹8.50, which a reduction from last year's comparable dividend. Despite the cut, the dividend yield of 0.9% will still be comparable to other companies in the industry.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Deepak Fertilisers And Petrochemicals' stock price has increased by 73% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for Deepak Fertilisers And Petrochemicals

Deepak Fertilisers And Petrochemicals' Payment Has Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Based on the last payment, Deepak Fertilisers And Petrochemicals was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Over the next year, EPS is forecast to expand by 80.0%. If the dividend continues on this path, the payout ratio could be 12% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2014, the annual payment back then was ₹6.50, compared to the most recent full-year payment of ₹8.50. This means that it has been growing its distributions at 2.7% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

The Dividend Looks Likely To Grow

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. Deepak Fertilisers And Petrochemicals has impressed us by growing EPS at 53% per year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 2 warning signs for Deepak Fertilisers And Petrochemicals (of which 1 is a bit unpleasant!) you should know about. Is Deepak Fertilisers And Petrochemicals not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.