Is It Worth Buying Mangalore Chemicals & Fertilizers Limited (NSE:MANGCHEFER) For Its 0.6% Dividend Yield?

Today we'll take a closer look at Mangalore Chemicals & Fertilizers Limited (NSE:MANGCHEFER) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A 0.6% yield is nothing to get excited about, but investors probably think the long payment history suggests Mangalore Chemicals & Fertilizers has some staying power. That said, the recent jump in the share price will make Mangalore Chemicals & Fertilizers's dividend yield look smaller, even though the company prospects could be improving. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. 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 7.8% of Mangalore Chemicals & Fertilizers' profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Mangalore Chemicals & Fertilizers' cash payout ratio last year was 3.2%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Mangalore Chemicals & Fertilizers' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

We update our data on Mangalore Chemicals & Fertilizers 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 Mangalore Chemicals & Fertilizers' dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was ₹1.0 in 2011, compared to ₹0.5 last year. This works out to be a decline of approximately 6.7% per year over that time. Mangalore Chemicals & Fertilizers' dividend hasn't shrunk linearly at 6.7% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Mangalore Chemicals & Fertilizers for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. It's good to see Mangalore Chemicals & Fertilizers has been growing its earnings per share at 66% a year over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.

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. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. All things considered, Mangalore Chemicals & Fertilizers looks like a strong prospect. At the right valuation, it could be something special.

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. As an example, we've identified 3 warning signs for Mangalore Chemicals & Fertilizers that you should be aware of before investing.

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

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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. 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.
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