Sadhana Nitro Chem (NSE:SADHNANIQ) Is Reducing Its Dividend To ₹0.10

Sadhana Nitro Chem Limited (NSE:SADHNANIQ) has announced that on 29th of October, it will be paying a dividend of₹0.10, which a reduction from last year's comparable dividend. The yield is still above the industry average at 1.0%.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Sadhana Nitro Chem's stock price has reduced by 45% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.

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Sadhana Nitro Chem's 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. Based on the last payment, Sadhana Nitro Chem's earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. 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.

If the company can't turn things around, EPS could fall by 15.5% over the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 85% in the next 12 months which is on the higher end of the range we would say is sustainable.

View our latest analysis for Sadhana Nitro Chem

Sadhana Nitro Chem's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2018, the dividend has gone from ₹0.039 total annually to ₹0.10. This means that it has been growing its distributions at 14% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Dividend Growth Potential Is Shaky

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Earnings per share has been sinking by 16% over the last five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.

An additional note is that the company has been raising capital by issuing stock equal to 33% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

The Dividend Could Prove To Be Unreliable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While Sadhana Nitro Chem is earning enough to cover the payments, the cash flows are lacking. We don't think Sadhana Nitro Chem is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 6 warning signs for Sadhana Nitro Chem you should be aware of, and 4 of them can't be ignored. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.