Should You Buy Unichem Laboratories Limited (NSE:UNICHEMLAB) For Its 1.5% Dividend?

Could Unichem Laboratories Limited (NSE:UNICHEMLAB) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A slim 1.5% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Unichem Laboratories could have potential. That said, the recent jump in the share price will make Unichem Laboratories's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Unichem Laboratories for its dividend, and we'll go through these below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Unichem Laboratories pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Unfortunately, while Unichem Laboratories 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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Unichem Laboratories' strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Unichem Laboratories every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Unichem Laboratories has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was ₹3.2 in 2010, compared to ₹4.0 last year. Dividends per share have grown at approximately 2.3% per year over this time. Unichem Laboratories' dividend payments have fluctuated, so it hasn't grown 2.3% every year, but the CAGR is a useful rule of thumb for approximating the historical 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. Unichem Laboratories' EPS have fallen by approximately 36% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that Unichem Laboratories' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Unichem Laboratories paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Unichem Laboratories looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Unichem Laboratories has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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