Does It Make Sense To Buy Tata Steel Long Products Limited (NSE:TATASTLLP) For Its Yield?

Is Tata Steel Long Products Limited (NSE:TATASTLLP) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A 2.7% yield is nothing to get excited about, but investors probably think the long payment history suggests Tata Steel Long Products has some staying power. There are a few simple ways to reduce the risks of buying Tata Steel Long Products for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Tata Steel Long Products!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although Tata Steel Long Products pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Unfortunately, while Tata Steel Long Products pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

Remember, you can always get a snapshot of Tata Steel Long Products's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Tata Steel Long Products's dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was ₹8.00 in 2010, compared to ₹12.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.6% a year over that time. The dividends haven't grown at precisely 4.6% every year, but this is a useful way to average out the historical rate of growth.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. In the last five years, Tata Steel Long Products's earnings per share have shrunk at approximately 6.0% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

We'd also point out that Tata Steel Long Products issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

To summarise, shareholders should always check that Tata Steel Long Products's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Earnings per share are down, and Tata Steel Long Products's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Tata Steel Long Products looks quite suboptimal from a dividend investment perspective.

Now, if you want to look closer, it would be worth checking out our free research on Tata Steel Long Products 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%.

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.

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. Thank you for reading.