U.S. Markets close in 3 hrs 17 mins

Should Income Investors Look At Poddar Pigments Limited (NSE:PODARPIGQ) Before Its Ex-Dividend?

Simply Wall St

Poddar Pigments Limited (NSE:PODARPIGQ) stock is about to trade ex-dividend in 3 days time. You can purchase shares before the 12th of September in order to receive the dividend, which the company will pay on the 21st of October.

Poddar Pigments's next dividend payment will be ₹3.00 per share. Last year, in total, the company distributed ₹3.00 to shareholders. Calculating the last year's worth of payments shows that Poddar Pigments has a trailing yield of 2.0% on the current share price of ₹154.9. If you buy this business for its dividend, you should have an idea of whether Poddar Pigments's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Poddar Pigments

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Poddar Pigments is paying out just 18% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out dividends equivalent to 333% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Poddar Pigments intends to continue funding this dividend, or if it could be forced to the payment.

Poddar Pigments 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.

Poddar Pigments paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Poddar Pigments to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

NSEI:PODARPIGQ Historical Dividend Yield, September 8th 2019

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Poddar Pigments, with earnings per share up 6.1% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 8 years, Poddar Pigments has increased its dividend at approximately 9.1% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Poddar Pigments? Poddar Pigments delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 333% of its cash flow over the last year, which is a mediocre outcome. Overall, it's hard to get excited about Poddar Pigments from a dividend perspective.

Want to learn more about Poddar Pigments? 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.