It looks like Royal Orchid Hotels Limited (NSE:ROHLTD) is about to go ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 12th of September will not receive the dividend, which will be paid on the 23rd of October.
Royal Orchid Hotels's upcoming dividend is ₹2.00 a share, following on from the last 12 months, when the company distributed a total of ₹2.00 per share to shareholders. Looking at the last 12 months of distributions, Royal Orchid Hotels has a trailing yield of approximately 2.9% on its current stock price of ₹69.4. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That's why it's good to see Royal Orchid Hotels paying out a modest 48% of its earnings. 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. The good news is it paid out just 15% of its free cash flow in the last year.
It's positive to see that Royal Orchid Hotels's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Royal Orchid Hotels has grown its earnings rapidly, up 99% a year for the past five years. Royal Orchid Hotels 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.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Royal Orchid Hotels's dividend payments per share have declined at 10% per year on average over the past 10 years, which is uninspiring. Royal Orchid Hotels is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
From a dividend perspective, should investors buy or avoid Royal Orchid Hotels? It's great that Royal Orchid Hotels 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. Royal Orchid Hotels looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Want to learn more about Royal Orchid Hotels? Here's a visualisation of its historical rate of 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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