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Could Marksans Pharma Limited (NSE:MARKSANS) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With a 0.3% yield and a five-year payment history, investors probably think Marksans Pharma looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. Remember that the recent share price drop will make Marksans Pharma's yield look higher, even though recent events might have impacted the company's prospects. Some simple research can reduce the risk of buying Marksans Pharma for its dividend - read on to learn more.
Explore this interactive chart for our latest analysis on Marksans Pharma!
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Marksans Pharma paid out 2.8% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Of the free cash flow it generated last year, Marksans Pharma paid out 31% as dividends, suggesting the dividend is affordable. 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.
We update our data on Marksans Pharma every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Marksans Pharma has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₹0.10 in 2014, compared to ₹0.05 last year. This works out to a decline of approximately 50% over that time.
A shrinking dividend over a five-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.