Don't Race Out To Buy Clariant Chemicals (India) Limited (NSE:CLNINDIA) Just Because It's Going Ex-Dividend

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 Clariant Chemicals (India) Limited (NSE:CLNINDIA) is about to go ex-dividend in just 3 days. Ex-dividend means that investors that purchase the stock on or after the 17th of August will not receive this dividend, which will be paid on the 19th of September.

Clariant Chemicals (India)'s upcoming dividend is ₹11.00 a share, following on from the last 12 months, when the company distributed a total of ₹11.00 per share to shareholders. Based on the last year's worth of payments, Clariant Chemicals (India) stock has a trailing yield of around 2.7% on the current share price of ₹405.45. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Clariant Chemicals (India)

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Clariant Chemicals (India) distributed an unsustainably high 137% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.

It's good to see that while Clariant Chemicals (India)'s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Clariant Chemicals (India) 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 earnings fall far enough, the company could be forced to cut its dividend. Clariant Chemicals (India)'s earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 53% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Clariant Chemicals (India) has seen its dividend decline 9.5% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

From a dividend perspective, should investors buy or avoid Clariant Chemicals (India)? It's not a great combination to see a company with earnings in decline and paying out 137% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Clariant Chemicals (India)'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.

Although, if you're still interested in Clariant Chemicals (India) and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 3 warning signs for Clariant Chemicals (India) (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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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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