Alkem Laboratories (NSE:ALKEM) Is Paying Out A Larger Dividend Than Last Year

Alkem Laboratories Limited (NSE:ALKEM) will increase its dividend from last year's comparable payment on the 24th of September to ₹10.00. Although the dividend is now higher, the yield is only 0.8%, which is below the industry average.

View our latest analysis for Alkem Laboratories

Alkem Laboratories' Earnings Easily Cover The Distributions

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. However, prior to this announcement, Alkem Laboratories' dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.

Over the next year, EPS is forecast to expand by 142.4%. If the dividend continues on this path, the payout ratio could be 29% by next year, which we think can be pretty sustainable going forward.

Alkem Laboratories' Dividend Has Lacked Consistency

It's comforting to see that Alkem Laboratories has been paying a dividend for a number of years now, however it has been cut at least once in that time. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2016, the dividend has gone from ₹6.00 total annually to ₹25.00. This implies that the company grew its distributions at a yearly rate of about 23% over that duration. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

Alkem Laboratories Could Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Alkem Laboratories has been growing its earnings per share at 9.3% a year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

Alkem Laboratories Looks Like A Great Dividend Stock

Overall, a dividend increase is always good, and we think that Alkem Laboratories is a strong income stock thanks to its track record and growing earnings. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All in all, this checks a lot of the boxes we look for when choosing an income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Alkem Laboratories that investors need to be conscious of moving forward. Is Alkem Laboratories not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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