Should Thirumalai Chemicals Limited (NSE:TIRUMALCHM) Be Part Of Your Dividend Portfolio?

Today we'll take a closer look at Thirumalai Chemicals Limited (NSE:TIRUMALCHM) 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 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.

In this case, Thirumalai Chemicals likely looks attractive to dividend investors, given its 3.3% dividend yield and nine-year payment history. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Thirumalai Chemicals for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Thirumalai Chemicals!

NSEI:TIRUMALCHM Historical Dividend Yield, October 15th 2019
NSEI:TIRUMALCHM Historical Dividend Yield, October 15th 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Thirumalai Chemicals paid out 22% of its profit as dividends, over the trailing twelve month period. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 50% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Thirumalai Chemicals has available to meet other needs. It's positive to see that Thirumalai Chemicals'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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Thirumalai Chemicals's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Thirumalai Chemicals every 24 hours, so you can always get our latest analysis of its financial health, 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. Looking at the last decade of data, we can see that Thirumalai Chemicals paid its first dividend at least 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 ₹0.50 in 2010, compared to ₹2.00 last year. Dividends per share have grown at approximately 17% per year over this time. Thirumalai Chemicals's dividend payments have fluctuated, so it hasn't grown 17% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Thirumalai Chemicals has grown its earnings per share at 51% per annum over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly - an ideal combination.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Thirumalai Chemicals's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Thirumalai Chemicals has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

Are management backing themselves to deliver performance? Check their shareholdings in Thirumalai Chemicals in our latest insider ownership analysis.

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.