Star Paper Mills (NSE:STARPAPER) Will Pay A Larger Dividend Than Last Year At ₹3.50

Star Paper Mills Limited (NSE:STARPAPER) has announced that it will be increasing its dividend from last year's comparable payment on the 21st of October to ₹3.50. This will take the annual payment to 1.7% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Star Paper Mills

Star Paper Mills' Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. However, prior to this announcement, Star Paper Mills' dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.

EPS is set to fall by 5.1% over the next 12 months if recent trends continue. Assuming the dividend continues along recent trends, we believe the payout ratio could be 13%, which we are pretty comfortable with and we think is feasible on an earnings basis.

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. Since 2012, the annual payment back then was ₹0.50, compared to the most recent full-year payment of ₹3.50. This works out to be a compound annual growth rate (CAGR) of approximately 21% a year 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 Is Doubtful

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Star Paper Mills has seen earnings per share falling at 5.1% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth.

Our Thoughts On Star Paper Mills' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Star Paper Mills' payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for Star Paper Mills (1 can't be ignored!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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