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Do These 3 Checks Before Buying Salona Cotspin Limited (NSE:SALONACOT) For Its Upcoming Dividend

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Salona Cotspin Limited (NSE:SALONACOT) is about to go ex-dividend in just 3 days. This means that investors who purchase shares on or after the 4th of September will not receive the dividend, which will be paid on the 12th of October.

Salona Cotspin's upcoming dividend is ₹0.60 a share, following on from the last 12 months, when the company distributed a total of ₹0.60 per share to shareholders. Last year's total dividend payments show that Salona Cotspin has a trailing yield of 0.8% on the current share price of ₹76.65. 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! As a result, readers should always check whether Salona Cotspin has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Salona Cotspin

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Salona Cotspin is paying out just 21% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Salona Cotspin generated enough free cash flow to afford its dividend.

Salona Cotspin paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.

It's positive to see that Salona Cotspin'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.

Click here to see how much of its profit Salona Cotspin paid out over the last 12 months.

NSEI:SALONACOT Historical Dividend Yield, August 31st 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Salona Cotspin's earnings per share have fallen at approximately 23% a year over the previous 5 years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Salona Cotspin has seen its dividend decline 5.5% per annum on average over the past 9 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Has Salona Cotspin got what it takes to maintain its dividend payments? Salona Cotspin's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Want to learn more about Salona Cotspin? Here's a visualisation of its historical rate of revenue and earnings growth.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.