Alkem Laboratories (NSE:ALKEM) Has Announced That Its Dividend Will Be Reduced To ₹5.00

Alkem Laboratories Limited (NSE:ALKEM) is reducing its dividend from last year's comparable payment to ₹5.00 on the 4th of September. Despite the cut, the dividend yield of 0.8% will still be comparable to other companies in the industry.

View our latest analysis for Alkem Laboratories

Alkem Laboratories' Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Alkem Laboratories was easily earning enough to cover the dividend. This means that most of its earnings are being retained to grow the business.

Over the next year, EPS is forecast to expand by 47.5%. Assuming the dividend continues along recent trends, we think the payout ratio could be 21% by next year, which is in a pretty sustainable range.

Alkem Laboratories' Dividend Has Lacked Consistency

Alkem Laboratories has been paying dividends for a while, but the track record isn't stellar. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2016, the annual payment back then was ₹6.00, compared to the most recent full-year payment of ₹40.00. This implies that the company grew its distributions at a yearly rate of about 27% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Alkem Laboratories has seen EPS rising for the last five years, at 19% per annum. Alkem Laboratories definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

We Really Like Alkem Laboratories' Dividend

It is generally not great to see the dividend being cut, but we don't think this should happen much if at all in the future given that Alkem Laboratories has the makings of a solid income stock moving forward. Reducing the amount it is paying as a dividend can protect the company's balance sheet, keeping the dividend sustainable for longer. All in all, this checks a lot of the boxes we look for when choosing an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Alkem Laboratories that investors need to be conscious of moving forward. 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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