King May 13, 2019

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Could Pilani Investment and Industries Corporation Limited (NSE:PILANIINVS) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With a 1.0% yield and a seven-year payment history, investors probably think Pilani Investment and Industries looks like a reliable dividend stock. A 1.0% yield is not inspiring, but the longer payment history has some appeal. There are a few simple ways to reduce the risks of buying Pilani Investment and Industries for its dividend, and we’ll go through these below.

Click the interactive chart for our full dividend analysis

NSEI:PILANIINVS Historical Dividend Yield, May 13th 2019
NSEI:PILANIINVS Historical Dividend Yield, May 13th 2019

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. In the last year, Pilani Investment and Industries paid out 17% of its profit as dividends. We’d say its dividends are thoroughly covered by earnings.

We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Pilani Investment and Industries paid out 93% of its free cash last year. Cash flows can be lumpy, but paying out this much cash is not ideal.

Consider getting our latest analysis on Pilani Investment and Industries’s financial position 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. Pilani Investment and Industries has been paying a dividend for the past seven years. Its dividend has not fluctuated much that time, which we like, but we’re conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. Its most recent annual dividend was ₹25.00 per share, effectively flat on its first payment seven years ago.

We like that the dividend hasn’t been shrinking. However we’re conscious that the company hasn’t got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Pilani Investment and Industries’s earnings per share shrank slightly over the past year or so. A short term decline in earnings is probably nothing to get worked up over, but we’d be looking to see a return to sustainable earnings growth. Still, we generally prefer companies generating even modest growth. Any one year of performance can be misleading for a variety of reasons, so we wouldn’t like to form any strong conclusions based on these numbers alone.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we like Pilani Investment and Industries’s low dividend payout ratio, although we’re a bit concerned that it paid out a substantially higher percentage of its free cash flow. Earnings per share have been falling, and the company has a relatively short dividend history – shorter than we like, anyway. With this information in mind, we think Pilani Investment and Industries may not be an ideal dividend stock.

Are management backing themselves to deliver performance? Check their shareholdings in Pilani Investment and Industries in our latest insider ownership analysis.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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.

[“source=simplywall”]