Nesco Limited (NSE:NESCO) Is An Attractive Dividend Stock

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Nesco Limited (NSE:NESCO) Is An Attractive Dividend Stock - Here's Why

Simply Wall St

Thu, Sep 19, 2019, 1:31 AM

Today we'll take a closer look at Nesco Limited (NSE:NESCO) 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. 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.

A 0.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Nesco has some staying power. Some simple analysis can reduce the risk of holding Nesco for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

NSEI:NESCO Historical Dividend Yield, September 19th 2019

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. 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. Looking at the data, we can see that 9.7% of Nesco's profits were paid out as dividends in the last 12 months. We'd say its dividends are thoroughly covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 77% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It's positive to see that Nesco'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.

With a strong net cash balance, Nesco investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Nesco's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

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. Nesco 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 ₹0.12 in 2009, compared to ₹2.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 35% 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 Nesco 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 Nesco has grown its earnings per share at 18% per annum over the past five years. Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Conclusion

To summarise, shareholders should always check that Nesco's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Nesco's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. Nesco performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

See if management have their own wealth at stake, by checking insider shareholdings in Nesco stock.

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.

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.

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