This inexpensive high-dividend stock offers solid ROE of over 50%

John D. Rockefeller once said, "Do you know the only thing that gives me pleasure? It's to see my dividends coming in". After all, earning rewards on top of your investments is like receiving gifts - the more, the better. So, it is only natural that some investors seek high-dividend paying companies that simultaneously offer solid growth.

However, finding such offerings is easier said than done, which is why we used our stock screener to find high-yielding dividend stocks with strong financials.

To our surprise, we found a company with a return on equity (ROE) of 51 per cent as of H1 FY24 and a dividend yield of over 5 per cent! It's also low-valued at a P/E of 19 times. The company is Nirlon, a nylon producer turned commercial real estate player.

Going by its return ratios, operating margins and valuations, Nirlon is a seemingly attractive bet. But here's why we differ:

Mature business

It's the maturity of Nirlon's business that is resulting in high-dividend payouts. After developing and fully leasing out its crown jewel - Nirlon Knowledge Park - over 23 acres of prime real estate in Goregaon, the company has made it clear it will not develop new projects anymore.

Given that no new investments are being made, the company's costs have considerably reduced, leading to high operating profit margins. Essentially, it is now a cash cow keen on rewarding its shareholders.

Note that real estate companies generate revenue either by developing projects for clients or by leasing or selling their own.

The growth question

It is obvious to ask how Nirlon plans to grow and the answer might be disappointing to some. The company says its growth will come only from new tenants and renewal of rent and lease agreements with increased rates.

In fact, the growth plan seems to hold less importance as the company's conference calls over the years have remained centred around secondary affairs like its possible restructuring (to become a REIT) and preference for the old tax regime.

Is the stock worth it, then?

The company is inexpensive at its P/E of 19 times, below the five-year median P/E of 23 times. Such low valuation with solid financial metrics is hard to come by, especially in the bull market of the last few years.

But, since the company's net profit has begun stagnating in the last few quarters, we decided to check how it compares to a fixed deposit investment.

Income from Nirlon in five years

Let's assume the company's market capitalisation (Rs 3,882 crore as of April 23) as your investment in it. What you earn on this investment is Nirlon's net profit of Rs 205 crore (trailing 12-months).

The company said it raises rent by 15 per cent every three years. So, at a supposed annual growth rate of 5 per cent, it will make you a net profit of Rs 1,189 crore in five years.

We estimate this to be your final returns from the company as its dividend payout is nearly 100 per cent given there is no need to reinvest in the business.

Income from FD in five years

A fixed deposit with the same investment of Rs 3,882 crore (Nirlon's market cap), at an annual rate of 8 per cent, will generate a higher income of Rs 1,552 crore in five years. All this while your principal remains safe.

Hence, it is wiser to invest in a relatively safer fixed deposit rather than Nirlon until it has plans to expand its business.

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