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 Tech Mahindra Limited (NSE:TECHM) is about to go ex-dividend in just two days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Tech Mahindra's shares on or after the 23rd of October will not receive the dividend, which will be paid on the 13th of November.
The company's next dividend payment will be ₹15.00 per share, on the back of last year when the company paid a total of ₹51.00 to shareholders. Based on the last year's worth of payments, Tech Mahindra has a trailing yield of 2.9% on the current stock price of ₹1779.10. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Tech Mahindra has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 82% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Tech Mahindra generated enough free cash flow 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.
View our latest analysis for Tech Mahindra
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Tech Mahindra, with earnings per share up 4.3% on average over the last five years. A high payout ratio of 82% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, Tech Mahindra could be signalling that its future growth prospects are thin.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Tech Mahindra has delivered an average of 24% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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
Should investors buy Tech Mahindra for the upcoming dividend? Earnings per share have been growing modestly and Tech Mahindra paid out a bit over half of its earnings and free cash flow last year. Overall, it's hard to get excited about Tech Mahindra from a dividend perspective.
With that being said, if dividends aren't your biggest concern with Tech Mahindra, you should know about the other risks facing this business. For example, we've found 1 warning sign for Tech Mahindra that we recommend you consider before investing in the business.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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