Does Bosch Limited (NSE:BOSCHLTD) Have A Place In Your Dividend Portfolio?
Dividend paying stocks like Bosch Limited (NSE:BOSCHLTD) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A 0.7% yield is nothing to get excited about, but investors probably think the long payment history suggests Bosch has some staying power. During the year, the company also conducted a buyback equivalent to around 4.8% of its market capitalisation. Some simple research can reduce the risk of buying Bosch for its dividend - read on to learn more.
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Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Bosch paid out 28% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Bosch paid out 177% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. While Bosch's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Bosch to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
With a strong net cash balance, Bosch investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Bosch's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Bosch has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was ₹25.00 in 2009, compared to ₹105 last year. Dividends per share have grown at approximately 15% per year over this time.
It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Bosch has done it, which we really like.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Earnings have grown at around 4.6% a year for the past five years, which is better than seeing them shrink! Bosch is paying out less than half of its earnings, which we like. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?
Conclusion
To summarise, shareholders should always check that Bosch's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Bosch has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Earnings per share growth has been slow, but we respect a company that maintains a relatively stable dividend. In sum, we find it hard to get excited about Bosch from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 8 Bosch analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
