The board of Himadri Speciality Chemical Limited (NSE:HSCL) has announced that it will pay a dividend on the 29th of October, with investors receiving ₹0.15 per share. The dividend yield is 0.3% based on this payment, which is a little bit low compared to the other companies in the industry.
Himadri Speciality Chemical's Dividend Is Well Covered By Earnings
It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Prior to this announcement, Himadri Speciality Chemical's earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Unless the company can turn things around, EPS could fall by 18.6% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 12%, which we are pretty comfortable with and we think is feasible on an earnings basis.
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 2011, the first annual payment was ₹0.10, compared to the most recent full-year payment of ₹0.15. This implies that the company grew its distributions at a yearly rate of about 4.1% over that duration. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
Dividend Growth Potential Is Shaky
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Himadri Speciality Chemical's EPS has fallen by approximately 19% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.
The Dividend Could Prove To Be Unreliable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While the low payout ratio is 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. To that end, Himadri Speciality Chemical has 4 warning signs (and 2 which are a bit concerning) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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