Today we'll take a closer look at Tamil Nadu Newsprint and Papers Limited (NSE:TNPL) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
With Tamil Nadu Newsprint and Papers yielding 3.9% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. 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.
NSEI:TNPL Historical Dividend Yield, November 1st 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. 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. In the last year, Tamil Nadu Newsprint and Papers paid out 35% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Tamil Nadu Newsprint and Papers's cash payout ratio last year was 4.5%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that Tamil Nadu Newsprint and Papers'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.
Is Tamil Nadu Newsprint and Papers's Balance Sheet Risky?
As Tamil Nadu Newsprint and Papers has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With net debt of 2.89 times its EBITDA, Tamil Nadu Newsprint and Papers has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. With EBIT of 2.16 times its interest expense, Tamil Nadu Newsprint and Papers's interest cover is starting to look a bit thin.
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. Tamil Nadu Newsprint and Papers has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was ₹4.50 in 2009, compared to ₹7.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.2% a year over that time. Tamil Nadu Newsprint and Papers's dividend payments have fluctuated, so it hasn't grown 5.2% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Tamil Nadu Newsprint and Papers's EPS are effectively flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation.
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 are down, and Tamil Nadu Newsprint and Papers's dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about Tamil Nadu Newsprint and Papers from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
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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.
