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Today we'll take a closer look at Shriram City Union Finance Limited (NSE:SHRIRAMCIT) 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.
A slim 1.3% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Shriram City Union Finance could have potential. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this 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. 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, Shriram City Union Finance paid out 12% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
We update our data on Shriram City Union Finance 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. Shriram City Union Finance 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 ₹5.00 in 2009, compared to ₹18.00 last year. Dividends per share have grown at approximately 14% per year over this time.
It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Shriram City Union Finance has done it, which we really like.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Shriram City Union Finance has grown its earnings per share at 11% 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.