Here's Why We're Wary Of Buying Kewal Kiran Clothing's (NSE:KKCL) For Its Upcoming 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 Kewal Kiran Clothing Limited (NSE:KKCL) is about to go ex-dividend in just 3 days. You will need to purchase shares before the 3rd of November to receive the dividend, which will be paid on the 21st of November.

Kewal Kiran Clothing's next dividend payment will be ₹15.00 per share, and in the last 12 months, the company paid a total of ₹43.00 per share. Based on the last year's worth of payments, Kewal Kiran Clothing stock has a trailing yield of around 4.1% on the current share price of ₹729.6. If you buy this business for its dividend, you should have an idea of whether Kewal Kiran Clothing's dividend is reliable and sustainable. As a result, readers should always check whether Kewal Kiran Clothing has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Kewal Kiran Clothing

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. Kewal Kiran Clothing paid out 162% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. It paid out 96% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

As Kewal Kiran Clothing's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Kewal Kiran Clothing's earnings per share have fallen at approximately 16% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Kewal Kiran Clothing has delivered 17% dividend growth per year on average over the past 10 years. 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. Kewal Kiran Clothing is already paying out 162% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Should investors buy Kewal Kiran Clothing for the upcoming dividend? Not only are earnings per share declining, but Kewal Kiran Clothing is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. Bottom line: Kewal Kiran Clothing has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Kewal Kiran Clothing. For example - Kewal Kiran Clothing has 3 warning signs we think you should be aware of.

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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