Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) Has Got What It Takes To Be An Attractive Dividend Stock

Is Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 1.4% yield is nothing to get excited about, but investors probably think the long payment history suggests Gujarat Narmada Valley Fertilizers & Chemicals has some staying power. Remember though, due to the recent spike in its share price, Gujarat Narmada Valley Fertilizers & Chemicals's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple research can reduce the risk of buying Gujarat Narmada Valley Fertilizers & Chemicals for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Gujarat Narmada Valley Fertilizers & Chemicals!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 12% of Gujarat Narmada Valley Fertilizers & Chemicals' 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. Gujarat Narmada Valley Fertilizers & Chemicals paid out a conservative 46% of its free cash flow as dividends last year. It's positive to see that Gujarat Narmada Valley Fertilizers & Chemicals' 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, Gujarat Narmada Valley Fertilizers & Chemicals investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Gujarat Narmada Valley Fertilizers & Chemicals' 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 Gujarat Narmada Valley Fertilizers & Chemicals' dividend 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 ₹3.3 in 2011, compared to ₹5.0 last year. Dividends per share have grown at approximately 4.4% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Gujarat Narmada Valley Fertilizers & Chemicals has grown its earnings per share at 18% per annum over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.

Conclusion

To summarise, shareholders should always check that Gujarat Narmada Valley Fertilizers & Chemicals' 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 Gujarat Narmada Valley Fertilizers & Chemicals is paying out a low percentage of its earnings and cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Gujarat Narmada Valley Fertilizers & Chemicals performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Gujarat Narmada Valley Fertilizers & Chemicals that investors should know about before committing capital to this stock.

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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