Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Birla Corporation Limited (NSE:BIRLACORPN) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 5th of August will not receive this dividend, which will be paid on the 21st of August.
Birla’s next dividend payment will be ₹7.50 per share, on the back of last year when the company paid a total of ₹7.50 to shareholders. Based on the last year’s worth of payments, Birla stock has a trailing yield of around 1.3% on the current share price of ₹581.3. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s 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. Birla has a low and conservative payout ratio of just 23% of its income after tax. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 7.8% 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.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see Birla’s earnings per share have risen 15% per annum over the last five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Birla has delivered 5.2% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because Birla is keeping back more of its profits to grow the business.
To Sum It Up
Has Birla got what it takes to maintain its dividend payments? Birla has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There’s a lot to like about Birla, and we would prioritise taking a closer look at it.
Ever wonder what the future holds for Birla? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.