Don't Buy Munjal Showa Limited (NSE:MUNJALSHOW) For Its Next Dividend Without Doing These Checks

Munjal Showa Limited (NSE:MUNJALSHOW) stock is about to trade ex-dividend in three days. This means that investors who purchase shares on or after the 27th of August will not receive the dividend, which will be paid on the 10th of October.

Munjal Showa's upcoming dividend is ₹4.50 a share, following on from the last 12 months, when the company distributed a total of ₹4.50 per share to shareholders. Last year's total dividend payments show that Munjal Showa has a trailing yield of 3.3% on the current share price of ₹135.55. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Munjal Showa can afford its dividend, and if the dividend could grow.

View our latest analysis for Munjal Showa

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Munjal Showa paid out 94% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Fortunately, it paid out only 40% of its free cash flow in the past year.

It's good to see that while Munjal Showa's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see how much of its profit Munjal Showa paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Munjal Showa's earnings per share have fallen at approximately 24% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Munjal Showa has delivered an average of 8.4% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Munjal Showa is already paying out 94% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Has Munjal Showa got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 94% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Munjal Showa's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Munjal Showa don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 5 warning signs for Munjal Showa (of which 1 is a bit concerning!) you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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