Indian Metals and Ferro Alloys' (NSE:IMFA) Shareholders Will Receive A Smaller Dividend Than Last Year

Indian Metals and Ferro Alloys Limited (NSE:IMFA) has announced that on 25th of August, it will be paying a dividend of₹5.00, which a reduction from last year's comparable dividend. This means that the annual payment is 3.5% of the current stock price, which is lower than what the rest of the industry is paying.

Check out our latest analysis for Indian Metals and Ferro Alloys

Indian Metals and Ferro Alloys' Payment Has Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Before making this announcement, Indian Metals and Ferro Alloys was easily earning enough to cover the dividend. This means that most of what the business earns is being used to help it grow.

Looking forward, earnings per share could rise by 3.9% over the next year if the trend from the last few years continues. If the dividend continues along recent trends, we estimate the payout ratio will be 26%, which is in the range that makes us comfortable with the sustainability of the dividend.

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. The dividend has gone from an annual total of ₹2.50 in 2013 to the most recent total annual payment of ₹10.00. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. Indian Metals and Ferro Alloys has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Earnings has been rising at 3.9% per annum over the last five years, which admittedly is a bit slow. While growth may be thin on the ground, Indian Metals and Ferro Alloys could always pay out a higher proportion of earnings to increase shareholder returns.

In Summary

Overall, we think that Indian Metals and Ferro Alloys could make a reasonable income stock, even though it did cut the dividend this year. The dividend has been at reasonable levels historically, but that hasn't translated into a consistent payment. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. 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 Indian Metals and Ferro Alloys 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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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.