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 Castrol India Limited (NSE:CASTROLIND) is about to go ex-dividend in just 3 days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Castrol India's shares before the 11th of August in order to receive the dividend, which the company will pay on the 2nd of September.
The company's next dividend payment will be ₹6.25 per share. Last year, in total, the company distributed ₹8.75 to shareholders. Looking at the last 12 months of distributions, Castrol India has a trailing yield of approximately 4.5% on its current stock price of ₹194.17. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
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. Last year Castrol India paid out 107% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 50% of the free cash flow it generated, which is a comfortable payout ratio.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Castrol India fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Check out our latest analysis for Castrol India
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Castrol India's earnings per share have risen 13% per annum over the last five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Castrol India has lifted its dividend by approximately 8.1% 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
Should investors buy Castrol India for the upcoming dividend? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Castrol India's paying out such a high percentage of its profit. Overall, it's hard to get excited about Castrol India from a dividend perspective.
While it's tempting to invest in Castrol India for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 2 warning signs for Castrol India you should be aware of.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.