Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) Is Reducing Its Dividend To ₹16.50

Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) has announced that on 20th of October, it will be paying a dividend of₹16.50, which a reduction from last year's comparable dividend. The dividend yield of 2.4% is still a nice boost to shareholder returns, despite the cut.

See our latest analysis for Gujarat Narmada Valley Fertilizers & Chemicals

Gujarat Narmada Valley Fertilizers & Chemicals' Earnings Easily Cover The Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Gujarat Narmada Valley Fertilizers & Chemicals was earning enough to cover the dividend, but it wasn't generating any free cash flows. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Looking forward, EPS could fall by 2.5% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 57%, which is definitely feasible to continue.

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 dividend has gone from ₹3.50 total annually to ₹16.50. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend's Growth Prospects Are Limited

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 not great to see that Gujarat Narmada Valley Fertilizers & Chemicals' earnings per share has fallen at approximately 2.5% per year over the past five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.

Gujarat Narmada Valley Fertilizers & Chemicals' Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While Gujarat Narmada Valley Fertilizers & Chemicals is earning enough to cover the payments, the cash flows are lacking. We don't think Gujarat Narmada Valley Fertilizers & Chemicals is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 2 warning signs for Gujarat Narmada Valley Fertilizers & Chemicals that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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