Should Income Investors Look At Delta Corp Limited (NSE:DELTACORP) Before Its Ex-Dividend?

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Readers hoping to buy Delta Corp Limited (NSE:DELTACORP) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 15th of July will not receive the dividend, which will be paid on the 23rd of August.

Delta’s next dividend payment will be ₹0.65 per share. Last year, in total, the company distributed ₹1.30 to shareholders. Based on the last year’s worth of payments, Delta stock has a trailing yield of around 0.8% on the current share price of ₹166.95. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether Delta can afford its dividend, and if the dividend could grow.

View our latest analysis for Delta

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Delta has a low and conservative payout ratio of just 17% of its income after tax. A useful secondary check can be to evaluate whether Delta generated enough free cash flow to afford its dividend. It paid out 105% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings – expenses don’t pay themselves – so it’s not great to see it paying out so much of its cash flow.

Delta does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Delta’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Cash is king, as they say, and were Delta to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

NSEI:DELTACORP Historical Dividend Yield, July 12th 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That’s why it’s comforting to see Delta’s earnings have been skyrocketing, up 37% per annum for the past five years.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Delta has delivered an average of 21% per year annual increase in its dividend, based on the past 10 years of dividend payments. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Has Delta got what it takes to maintain its dividend payments? We like that Delta has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we’re not all that optimistic on its dividend prospects.