Unichem Laboratories (NSE:UNICHEMLAB) Will Pay A Dividend Of ₹4.00

Unichem Laboratories Limited (NSE:UNICHEMLAB) has announced that it will pay a dividend of ₹4.00 per share on the 20th of August. This means the annual payment is 1.5% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Unichem Laboratories

Unichem Laboratories' Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Unichem Laboratories was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. This is a pretty unsustainable practice, and could be risky if continued for the long term.

Looking forward, earnings per share could rise by 36.1% over the next year if the trend from the last few years continues. If the dividend continues along recent trends, we estimate the payout ratio will be 66%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2012, the annual payment back then was ₹3.00, compared to the most recent full-year payment of ₹4.00. This implies that the company grew its distributions at a yearly rate of about 2.9% over that duration. It's encouraging 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, which makes this less attractive as an income investment.

Unichem Laboratories' Dividend Might Lack Growth

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. 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. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would probably look elsewhere for an income investment.

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. For instance, we've picked out 1 warning sign for Unichem Laboratories that investors should take into consideration. Is Unichem Laboratories not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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