Gujarat State Fertilizers & Chemicals (NSE:GSFC) Is Paying Out A Larger Dividend Than Last Year

Gujarat State Fertilizers & Chemicals Limited's (NSE:GSFC) dividend will be increasing from last year's payment of the same period to ₹5.00 on 24th of October. This will take the dividend yield to an attractive 2.5%, providing a nice boost to shareholder returns.

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Gujarat State Fertilizers & Chemicals' Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Gujarat State Fertilizers & Chemicals' earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Over the next year, EPS is forecast to expand by 2.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 34%, which is in the range that makes us comfortable with the sustainability of the dividend.

Check out our latest analysis for Gujarat State Fertilizers & Chemicals

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2015, the annual payment back then was ₹2.20, compared to the most recent full-year payment of ₹5.00. This works out to be a compound annual growth rate (CAGR) of approximately 8.6% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that Gujarat State Fertilizers & Chemicals has grown earnings per share at 46% per year over the past five years. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.

Our Thoughts On Gujarat State Fertilizers & Chemicals' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Gujarat State Fertilizers & Chemicals' payments are rock solid. While Gujarat State Fertilizers & Chemicals is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Gujarat State Fertilizers & Chemicals that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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