Nxtdigital Limited (NSE:NXTDIGITAL) is reducing its dividend to ₹4.00 on the 28th of October. This means that the dividend yield is 0.8%, which is a bit low when comparing to other companies in the industry.
Nxtdigital's Distributions May Be Difficult To Sustain
Even a low dividend yield can be attractive if it is sustained for years on end. Nxtdigital is not generating a profit, but its free cash flows easily cover the dividend, leaving plenty for reinvestment in the business. This gives us some comfort about the level of the dividend payments.
Over the next year, EPS could expand by 21.7% if recent trends continue. It's nice to see things moving in the right direction, but this probably won't be enough for the company to turn a profit. However, the positive cash flow ratio gives us some comfort about the sustainability of the dividend.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from ₹12.50 in 2011 to the most recent annual payment of ₹4.00. Dividend payments have fallen sharply, down 68% over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
The Company Could Face Some Challenges Growing The Dividend
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. We are encouraged to see that Nxtdigital has grown earnings per share at 22% per year over the past five years. While the company is not yet turning a profit, it is growing at a good rate. If this trajectory continues and the company can turn a profit soon, it could bode well for the dividend going forward.
We'd also point out that Nxtdigital has issued stock equal to 17% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Nxtdigital that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
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