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 Gujarat Alkalies and Chemicals Limited (NSE:GUJALKALI) is about to go ex-dividend in just three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Gujarat Alkalies and Chemicals' shares before the 18th of September in order to receive the dividend, which the company will pay on the 25th of October.
The company's next dividend payment will be ₹17.70 per share. Last year, in total, the company distributed ₹17.70 to shareholders. Based on the last year's worth of payments, Gujarat Alkalies and Chemicals stock has a trailing yield of around 2.5% on the current share price of ₹705.00. 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 check whether the dividend payments are covered, and if earnings are growing.
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. Gujarat Alkalies and Chemicals reported a loss last year, so it's not great to see that it has continued paying a dividend. A useful secondary check can be to evaluate whether Gujarat Alkalies and Chemicals generated enough free cash flow to afford its dividend. It paid out 79% 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.
See our latest analysis for Gujarat Alkalies and Chemicals
Click here to see how much of its profit Gujarat Alkalies and Chemicals paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Gujarat Alkalies and Chemicals's 17% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Gujarat Alkalies and Chemicals has delivered an average of 15% per year annual increase in its dividend, based on the past 10 years of dividend payments.
The Bottom Line
Is Gujarat Alkalies and Chemicals an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. Worse, Gujarat Alkalies and Chemicals's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Gujarat Alkalies and Chemicals. For example, Gujarat Alkalies and Chemicals has 2 warning signs (and 1 which can't be ignored) we think you should know about.
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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.