Gujarat State Fertilizers & Chemicals (NSE:GSFC) Will Pay A Smaller Dividend Than Last Year

Gujarat State Fertilizers & Chemicals Limited's (NSE:GSFC) dividend is being reduced from last year's payment covering the same period to ₹4.00 on the 24th of October. The yield is still above the industry average at 1.7%.

Check out our latest analysis for Gujarat State Fertilizers & Chemicals

Gujarat State Fertilizers & Chemicals' Earnings Easily Cover The Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Gujarat State Fertilizers & Chemicals' earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Over the next year, EPS could expand by 3.0% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 32%, which is in the range that makes us comfortable with the sustainability of the dividend.

Gujarat State Fertilizers & Chemicals' Dividend Has Lacked Consistency

Gujarat State Fertilizers & Chemicals has been paying dividends for a while, but the track record isn't stellar. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2015, the dividend has gone from ₹2.20 total annually to ₹4.00. This means that it has been growing its distributions at 6.9% per annum over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. However, Gujarat State Fertilizers & Chemicals has only grown its earnings per share at 3.0% per annum over the past five years. While growth may be thin on the ground, Gujarat State Fertilizers & Chemicals could always pay out a higher proportion of earnings to increase shareholder returns.

In Summary

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for Gujarat State Fertilizers & Chemicals that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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