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Dividend paying stocks like Jagran Prakashan Limited (NSE:JAGRAN) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
With Jagran Prakashan yielding 6.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. The company also bought back stock during the year, equivalent to approximately 22% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying Jagran Prakashan for its dividend - read on to learn more.
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Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Jagran Prakashan paid out 32% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.
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 62% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Jagran Prakashan has available to meet other needs. It's positive to see that Jagran Prakashan'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.
With a strong net cash balance, Jagran Prakashan investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Jagran Prakashan 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. Jagran Prakashan 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 cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was ₹2.00 in 2009, compared to ₹3.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.8% a year over that time. The dividends haven't grown at precisely 5.8% every year, but this is a useful way to average out the historical rate of growth.