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Could Lakshmi Machine Works Limited (NSE:LAXMIMACH) 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. 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.
Investors might not know much about Lakshmi Machine Works's dividend prospects, even though it has been paying dividends for the last nine years and offers a 0.7% yield. While the yield may not look too great, the relatively long payment history is interesting. The company also bought back stock during the year, equivalent to approximately 2.8% of the company's market capitalisation at the time. Some simple analysis can reduce the risk of holding Lakshmi Machine Works for its dividend, and we'll focus on the most important aspects below.
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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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Lakshmi Machine Works paid out 21% 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. Last year, Lakshmi Machine Works paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable. 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.
Consider getting our latest analysis on Lakshmi Machine Works's financial position 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. The first recorded dividend for Lakshmi Machine Works, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was ₹15.00 in 2010, compared to ₹35.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.9% a year over that time. Lakshmi Machine Works's dividend payments have fluctuated, so it hasn't grown 9.9% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.