Alkem Laboratories' (NSE:ALKEM) Shareholders Will Receive A Smaller Dividend Than Last Year

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' Payment Has Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. However, prior to this announcement, Alkem Laboratories' dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.

Over the next year, EPS is forecast to expand by 46.8%. 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

Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2016, the dividend has gone from ₹6.00 total annually to ₹40.00. This works out to be a compound annual growth rate (CAGR) of approximately 27% a year over that time. 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

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that Alkem Laboratories has grown earnings per share at 19% per year over the past five years. 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

Overall, we think that Alkem Laboratories could be a great option for a dividend investment, although we would have preferred if the dividend wasn't cut this year. By reducing the dividend, pressure will be taken off the balance sheet, which could help the dividend to be consistent in the future. Taking this all into consideration, this looks like it could be a good dividend opportunity.

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 1 warning sign for Alkem Laboratories that investors should know about before committing capital to this stock. 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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