Here's What You Should Know About The India Cements Limited's (NSE:INDIACEM) 0.8% Dividend Yield

Is The India Cements Limited (NSE:INDIACEM) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 0.8% yield is nothing to get excited about, but investors probably think the long payment history suggests India Cements has some staying power. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on India Cements!

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 38% of India Cements's profits were paid out as dividends in the last 12 months. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. India Cements's cash payout ratio last year was 9.7%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.

Is India Cements's Balance Sheet Risky?

As India Cements has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.

A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. With net debt of above 3x EBITDA, investors are starting to take on a meaningful amount of risk, should the business enter a downturn.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 1.66 times its interest expense, India Cements's interest cover is starting to look a bit thin.

We update our data on India Cements every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of India Cements's dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was ₹2.00 in 2009, compared to ₹0.80 last year. The dividend has shrunk at around -8.8% a year during that period. India Cements's dividend has been cut sharply at least once, so it hasn't fallen by -8.8% every year, but this is a decent approximation of the long term change.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. EPS have fallen -19% over the last 12 months. That's not great to see, but there could be a number of reasons for this. Should the decline continue, we would become concerned. We do note though, one year is too short a time to be drawing strong conclusions about a company's future growth prospects.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's great to see that India Cements is paying out a low percentage of its earnings and cash flow. Earnings per share are down, and India Cements's dividend has been cut at least once in the past, which is disappointing. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than India Cements out there.

Now, if you want to look closer, it would be worth checking out our free research on India Cements management tenure, salary, and performance.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.