Should Salona Cotspin Limited (NSE:SALONACOT) Be Part Of Your Dividend Portfolio?
Simply Wall St
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Could Salona Cotspin Limited (NSE:SALONACOT) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
Investors might not know much about Salona Cotspin's dividend prospects, even though it has been paying dividends for the last nine years and offers a 0.7% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. Some simple analysis can reduce the risk of holding Salona Cotspin for its dividend, and we'll focus on the most important aspects below.
NSEI:SALONACOT Historical Dividend Yield, July 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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Salona Cotspin paid out 19% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.
Is Salona Cotspin's Balance Sheet Risky?
As Salona Cotspin has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and 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). Salona Cotspin is carrying net debt of 4.65 times its EBITDA, which is getting towards the upper limit of our comfort range on a dividend stock that the investor hopes will endure a wide range of economic circumstances.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. With EBIT of 1.55 times its interest expense, Salona Cotspin's interest cover is starting to look a bit thin.
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. The first recorded dividend for Salona Cotspin, in the last decade, was nine years ago. It's good to see that Salona Cotspin has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was ₹1.00 in 2010, compared to ₹0.60 last year. The dividend has shrunk at around 5.5% a year during that period. Salona Cotspin's dividend hasn't shrunk linearly at 5.5% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Salona Cotspin for its dividend, given that payments have shrunk over the past nine years.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's not great to see that Salona Cotspin's have fallen at approximately 22% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
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. It's great to see that Salona Cotspin is paying out a low percentage of its earnings and cash flow. Earnings per share are down, and Salona Cotspin's dividend has been cut at least once in the past, which is disappointing. Ultimately, Salona Cotspin comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
See if management have their own wealth at stake, by checking insider shareholdings in Salona Cotspin stock.
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.
