Here's How We Evaluate The Western India Plywoods Limited's (NSE:WIPL) Dividend
Dividend paying stocks like The Western India Plywoods Limited (NSE:WIPL) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Explore this interactive chart for our latest analysis on Western India Plywoods!
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. Looking at the data, we can see that 75% of Western India Plywoods's profits were paid out as dividends in the last 12 months. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
Is Western India Plywoods's Balance Sheet Risky?
As Western India Plywoods 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 2.39 times its EBITDA, Western India Plywoods's debt burden is within a normal range for most listed companies.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Interest cover of 1.47 times its interest expense is starting to become a concern for Western India Plywoods, and be aware that lenders may place additional restrictions on the company as well.
Consider getting our latest analysis on Western India Plywoods's financial position here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Its most recent annual dividend was ₹0.90 per share.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. While there may be fluctuations in the past , Western India Plywoods's earnings per share have basically not grown from where they were five years ago. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
Conclusion
To summarise, shareholders should always check that Western India Plywoods's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Western India Plywoods has an acceptable payout ratio and its dividend is well covered by cashflow. Second, the company has not been able to generate earnings growth, and its history of dividend payments too short for us to thoroughly evaluate the dividend's consistency across an economic cycle. In sum, we find it hard to get excited about Western India Plywoods 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.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Western India Plywoods stock.
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.
