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Is G.M.Breweries Limited (NSE:GMBREW) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
While G.M.Breweries's 0.6% dividend yield is not the highest, we think its lengthy payment history is quite interesting. There are a few simple ways to reduce the risks of buying G.M.Breweries for its dividend, and we'll go through these below.
Explore this interactive chart for our latest analysis on G.M.Breweries!
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. G.M.Breweries paid out 6.7% of its profit as dividends, over the trailing twelve month period. 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. G.M.Breweries's cash payout ratio last year was 7.2%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that G.M.Breweries'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.
Consider getting our latest analysis on G.M.Breweries'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. For the purpose of this article, we only scrutinise the last decade of G.M.Breweries's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was ₹1.02 in 2009, compared to ₹3.00 last year. Dividends per share have grown at approximately 11% per year over this time.
With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.