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Is It Smart To Buy Caplin Point Laboratories Limited (NSE:CAPPL) Before It Goes Ex-Dividend?

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Caplin Point Laboratories Limited (NSE:CAPPL) is about to trade ex-dividend in the next 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 10th of October.

Caplin Point Laboratories's next dividend payment will be ₹2.20 per share, on the back of last year when the company paid a total of ₹2.20 to shareholders. Based on the last year's worth of payments, Caplin Point Laboratories has a trailing yield of 0.5% on the current stock price of ₹427.35. If you buy this business for its dividend, you should have an idea of whether Caplin Point Laboratories's dividend is reliable and sustainable. So we need to investigate whether Caplin Point Laboratories can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Caplin Point Laboratories

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. Caplin Point Laboratories is paying out just 8.8% 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. It paid out 83% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Caplin Point Laboratories paid out over the last 12 months.

NSEI:CAPPL Historical Dividend Yield, August 31st 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Caplin Point Laboratories has grown its earnings rapidly, up 56% a year for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 9 years, Caplin Point Laboratories has lifted its dividend by approximately 31% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Is Caplin Point Laboratories an attractive dividend stock, or better left on the shelf? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

Want to learn more about Caplin Point Laboratories's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

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 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.