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Is Jagsonpal Pharmaceuticals Limited (NSE:JAGSNPHARM) A Smart Pick For Income Investors?

Simply Wall St

Today we'll take a closer look at Jagsonpal Pharmaceuticals Limited (NSE:JAGSNPHARM) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A slim 0.4% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Jagsonpal Pharmaceuticals could have potential. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Jagsonpal Pharmaceuticals!

NSEI:JAGSNPHARM Historical Dividend Yield, May 24th 2019

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Jagsonpal Pharmaceuticals paid out 8.8% of its profit as dividends, over the trailing twelve month period. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while Jagsonpal Pharmaceuticals pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective. 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.

With a strong net cash balance, Jagsonpal Pharmaceuticals investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Jagsonpal Pharmaceuticals every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Jagsonpal Pharmaceuticals has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was ₹0.25 in 2009, compared to ₹0.10 last year. The dividend has shrunk at around 8.8% a year during that period. Jagsonpal Pharmaceuticals's dividend hasn't shrunk linearly at -8.8% per annum, but the CAGR is a useful estimate of the historical rate of change.


Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Jagsonpal Pharmaceuticals has grown its earnings per share at 10% per annum over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.

Conclusion

To summarise, shareholders should always check that Jagsonpal Pharmaceuticals's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like Jagsonpal Pharmaceuticals's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Jagsonpal Pharmaceuticals out there.

Now, if you want to look closer, it would be worth checking out our free research on Jagsonpal Pharmaceuticals management tenure, salary, and performance.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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.