Could Escorts Limited (NSE: ESCORTS) be an attractive dividend stock over the long term? Investors are often drawn to strong companies that want to reinvest the dividends. If you want to live off the income from dividends, it is important that your investments are much more rigorous than the average punter.
A 0.2% return isn’t cause for alarm, but investors likely believe that the long payment history suggests Escorts has some stamina. Whenever you buy stocks for their dividends, be sure to go through the following tests to see if the dividend looks sustainable.
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NSEI: ESCORTS Historic Dividend April 13, 2021
Companies (usually) pay dividends on their earnings. If a company pays more than it makes, the dividend may need to be cut. Hence, we should always examine whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Last year Escorts paid out 3.1% of its profits as dividends. With a low payout ratio, the dividend appears to be fully covered by earnings.
We also measure dividends paid by a company’s indebted free cash flow to determine if enough cash has been generated to cover the dividend. The cash payment rate from escorts was 1.9% last year. Cash flows tend to be inconsistent, but this seems like a reasonably conservative payout. It is positive to see that Escorts’ dividend is covered by both earnings and cash flow, as 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 is shortened.
With a strong net cash balance, escort investors may not have to worry much in the short term from a dividend perspective.
We update our escorts data every 24 hours so you always get our latest financial health analysis here.
One of the biggest risks of relying on dividend income is a company’s potential to struggle financially and lower its dividend. Not only will your income be cut, but the value of your investment will decrease – nasty. For the purposes of this article, we’re only examining the past decade of escorts’ dividend payments. During that period, the dividend was stable, which could mean the business could have relatively consistent profitability. For the past 10 years, the first annual payment in 2011 was £ 1.0 compared to £ 2.5 a year ago. The dividend per share rose by around 9.6% per year during this period.
Companies like this that grow their dividends appropriately can be very valuable over the long term if the rate of growth can be sustained.
Dividend growth potential
Dividend payments have been constant over the past few years, but we should always check to see if earnings per share (EPS) is growing as it helps maintain dividend purchasing power. Strong earnings per share (EPS) growth could fuel our interest in the company despite fluctuating dividends. So it’s nice to see that Escorts has increased earnings per share by 49% per year over the past five years. The company pays only a fraction of its profits as dividends and has historically been able to use retained earnings to quickly grow its profits – an ideal combination.
We would also like to point out that Escorts issued a significant number of new shares over the past year. Trying to increase the dividend when issuing new shares reminds us of the ancient Greek story of Sisyphus, who constantly pushed a boulder uphill. Companies that consistently issue new shares are often not optimal from a dividend perspective.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) there is a track record of consistent payments, and c) if the dividend can grow. It’s great to see Escorts paying out a small percentage of their earnings and cash flow. The growing earnings per share and steady dividend payments are a great combination. With all of these things in mind, we think this organization has a lot going for it from a dividend perspective.
Investors generally tend to prefer companies with a consistent, stable dividend policy over companies with an erratic dividend policy. At the same time, there are other factors our readers should consider before investing capital in any stock. For example, we chose 2 warning signs for escorts Investors should know this before investing capital in this stock.
If you’re a dividend investor, you should also check out our curated list of dividend stocks that deliver over 3% returns.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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