Bodal Chemicals Limited (NSE:BODALCHEM) stock is about to trade ex-dividend in 3 days time. Investors can purchase shares before the 12th of September in order to be eligible for this dividend, which will be paid on the 20th of October.
Bodal Chemicals's next dividend payment will be ₹0.80 per share, and in the last 12 months, the company paid a total of ₹0.80 per share. Calculating the last year's worth of payments shows that Bodal Chemicals has a trailing yield of 1.1% on the current share price of ₹70.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Bodal Chemicals has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Bodal Chemicals has a low and conservative payout ratio of just 7.6% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 26% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Bodal Chemicals's earnings have been skyrocketing, up 31% per annum for the past five years. Bodal Chemicals is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
We'd also point out that Bodal Chemicals issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Bodal Chemicals has increased its dividend at approximately 1.1% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Bodal Chemicals is keeping back more of its profits to grow the business.
The Bottom Line
Is Bodal Chemicals worth buying for its dividend? It's great that Bodal Chemicals is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Bodal Chemicals looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Keen to explore more data on Bodal Chemicals's financial performance? Check out our visualisation of its historical revenue and earnings growth.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.