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Is The Peria Karamalai Tea and Produce Company Limited (NSE:PKTEA) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.
Investors might not know much about Peria Karamalai Tea and Produce's dividend prospects, even though it has been paying dividends for the last seven years and offers a 0.6% yield. While the yield may not look too great, the relatively long payment history is interesting. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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. Peria Karamalai Tea and Produce paid out 7.9% 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.
Is Peria Karamalai Tea and Produce's Balance Sheet Risky?
As Peria Karamalai Tea and Produce has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. Peria Karamalai Tea and Produce has net debt of 2.60 times its EBITDA. Using debt can accelerate business growth, but also increases the risks.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 2.80 times its interest expense, Peria Karamalai Tea and Produce's interest cover is starting to look a bit thin.
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. Peria Karamalai Tea and Produce has been paying a dividend for the past seven years. During the past seven-year period, the first annual payment was ₹3.00 in 2012, compared to ₹0.75 last year. This works out to a decline of approximately 75% over that time.
We struggle to make a case for buying Peria Karamalai Tea and Produce for its dividend, given that payments have shrunk over the past seven years.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Peria Karamalai Tea and Produce has grown its earnings per share at 15% 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.
To summarise, shareholders should always check that Peria Karamalai Tea and Produce's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Peria Karamalai Tea and Produce has low and conservative payout ratios. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. All things considered, Peria Karamalai Tea and Produce looks like a strong prospect. At the right valuation, it could be something special.
See if management have their own wealth at stake, by checking insider shareholdings in Peria Karamalai Tea and Produce stock.
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 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.