Readers hoping to buy Carraro India Limited (NSE:CARRARO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase Carraro India's shares on or after the 3rd of September, you won't be eligible to receive the dividend, when it is paid on the 10th of October.
The company's upcoming dividend is ₹6.75 a share, following on from the last 12 months, when the company distributed a total of ₹6.75 per share to shareholders. Based on the last year's worth of payments, Carraro India has a trailing yield of 1.2% on the current stock price of ₹557.80. 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 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. Fortunately Carraro India's payout ratio is modest, at just 29% of profit. A useful secondary check can be to evaluate whether Carraro India generated enough free cash flow to afford its dividend. It distributed 25% of its free cash flow as dividends, a comfortable payout level for most companies.
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.
Check out our latest analysis for Carraro India
Click here to see how much of its profit Carraro India paid out over the last 12 months.
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. It's encouraging to see Carraro India has grown its earnings rapidly, up 97% a year for the past five years. Carraro India is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
Given that Carraro India has only been paying a dividend for a year, there's not much of a past history to draw insight from.
The Bottom Line
Has Carraro India got what it takes to maintain its dividend payments? We love that Carraro India 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. There's a lot to like about Carraro India, and we would prioritise taking a closer look at it.
Keen to explore more data on Carraro India's financial performance? Check out our visualisation of its historical revenue and earnings growth.
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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.