Don't Buy Tanla Solutions Limited (NSE:TANLA) For Its Next Dividend Without Doing These Checks

September 13, 2020

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tanla Solutions Limited (NSE:TANLA) is about to trade ex-dividend in the next two days. If you purchase the stock on or after the 17th of September, you won't be eligible to receive this dividend, when it is paid on the 30th of September.

Tanla Solutions's upcoming dividend is ₹1.00 a share, following on from the last 12 months, when the company distributed a total of ₹1.00 per share to shareholders. Last year's total dividend payments show that Tanla Solutions has a trailing yield of 0.4% on the current share price of ₹267.8. 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.

See our latest analysis for Tanla Solutions

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Tanla Solutions lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 4.9% of its free cash flow as dividends last year, which is conservatively low.

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

historic-dividend — NSEI:TANLA Historic Dividend September 14th 2020

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. Tanla Solutions was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Tanla Solutions has delivered an average of 26% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Get our latest analysis on Tanla Solutions's balance sheet health here.

The Bottom Line

From a dividend perspective, should investors buy or avoid Tanla Solutions? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." It's not that we think Tanla Solutions is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Tanla Solutions as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 2 warning signs for Tanla Solutions (of which 1 is a bit unpleasant!) 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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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. 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.
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