You Have To Love Gujarat State Petronet Limited's (NSE:GSPL) Dividend

Unlock stock picks and a broker-level newsfeed that powers Wall Street.

Simply Wall St

Tue, Sep 3, 2019, 7:32 PM

Today we'll take a closer look at Gujarat State Petronet Limited (NSE:GSPL) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

While Gujarat State Petronet's 0.9% dividend yield is not the highest, we think its lengthy payment history is quite interesting. 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 Gujarat State Petronet!

NSEI:GSPL Historical Dividend Yield, September 4th 2019

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Gujarat State Petronet paid out 10% of its profit as dividends, over the trailing twelve month period. With a low payout ratio, it looks like the dividend is comprehensively 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. Gujarat State Petronet's cash payout ratio last year was 14%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Gujarat State Petronet'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.

We update our data on Gujarat State Petronet 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. Gujarat State Petronet has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was ₹0.75 in 2009, compared to ₹2.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time.

It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Gujarat State Petronet has done it, which we really like.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Gujarat State Petronet has grown its earnings per share at 22% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.

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 that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Earnings per share have not been growing, but we respect a company that maintains a relatively stable dividend. Overall, we think there are a lot of positives to Gujarat State Petronet from a dividend perspective.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 20 Gujarat State Petronet analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

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.

Terms and Privacy Policy

Your Privacy Choices

Utah Privacy Notice

More Info