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Hikal Limited (NSE:HIKAL) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 23rd of July will not receive this dividend, which will be paid on the 31st of August.
Hikal's upcoming dividend is ₹0.60 a share, following on from the last 12 months, when the company distributed a total of ₹1.20 per share to shareholders. Based on the last year's worth of payments, Hikal has a trailing yield of 0.8% on the current stock price of ₹158.75. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Hikal is paying out just 14% 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 Hikal generated enough free cash flow to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Hikal'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.
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Hikal's earnings per share have been growing at 10% a year for the past five years.
Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Hikal has lifted its dividend by approximately 2.5% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Hikal is keeping back more of its profits to grow the business.
To Sum It Up
From a dividend perspective, should investors buy or avoid Hikal? It's great that Hikal is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Hikal looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Ever wonder what the future holds for Hikal? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top 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 firstname.lastname@example.org. 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.