Unichem Laboratories (NSE:UNICHEMLAB) Is Due To Pay A Dividend Of ₹4.00

The board of Unichem Laboratories Limited (NSE:UNICHEMLAB) has announced that it will pay a dividend on the 20th of August, with investors receiving ₹4.00 per share. The dividend yield will be 1.3% based on this payment which is still above the industry average.

View our latest analysis for Unichem Laboratories

Unichem Laboratories' Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Unichem Laboratories' dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. Generally, we think that this would be a risky long term practice.

Over the next year, EPS could expand by 36.1% if recent trends continue. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 66% which brings it into quite a comfortable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was ₹3.00 in 2012, and the most recent fiscal year payment was ₹4.00. This works out to be a compound annual growth rate (CAGR) of approximately 2.9% a year over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Unichem Laboratories' Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Unichem Laboratories has been growing its earnings per share at 36% a year over the past five years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Unichem Laboratories is not retaining those earnings to reinvest in growth.

The Dividend Could Prove To Be Unreliable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We don't think Unichem Laboratories is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 1 warning sign for Unichem Laboratories that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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