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Is It Smart To Buy Shemaroo Entertainment Limited (NSE:SHEMAROO) 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 Shemaroo Entertainment Limited (NSE:SHEMAROO) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 16th of September will not receive this dividend, which will be paid on the 24th of October.

Shemaroo Entertainment's next dividend payment will be ₹1.65 per share, and in the last 12 months, the company paid a total of ₹1.65 per share. Looking at the last 12 months of distributions, Shemaroo Entertainment has a trailing yield of approximately 0.7% on its current stock price of ₹237.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Shemaroo Entertainment can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Shemaroo Entertainment

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. Shemaroo Entertainment has a low and conservative payout ratio of just 5.6% of its income after tax. 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. The good news is it paid out just 15% of its free cash flow in the last year.

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 Shemaroo Entertainment paid out over the last 12 months.

NSEI:SHEMAROO Historical Dividend Yield, September 12th 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. 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, Shemaroo Entertainment's earnings per share have been growing at 16% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Shemaroo Entertainment has delivered 8.3% dividend growth per year on average over the past 4 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is Shemaroo Entertainment an attractive dividend stock, or better left on the shelf? We love that Shemaroo Entertainment is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Overall we think this is an attractive combination and worthy of further research.

Curious about whether Shemaroo Entertainment has been able to consistently generate growth? Here's a chart 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.