Is It Smart To Buy Mahanagar Gas Limited (NSE:MGL) Before It Goes Ex-Dividend?

Mahanagar Gas Limited (NSE:MGL) stock is about to trade ex-dividend in 3 days time. Ex-dividend means that investors that purchase the stock on or after the 6th of March will not receive this dividend, which will be paid on the 16th of March.

Mahanagar Gas’s upcoming dividend is ₹9.50 a share, following on from the last 12 months, when the company distributed a total of ₹20.00 per share to shareholders. Looking at the last 12 months of distributions, Mahanagar Gas has a trailing yield of approximately 2.0% on its current stock price of ₹1005.3. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Mahanagar Gas

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Mahanagar Gas paid out a comfortable 26% of its profit last year. 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. It distributed 46% of its free cash flow as dividends, a comfortable payout level for most companies.

It’s positive to see that Mahanagar Gas’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

NSEI:MGL Historical Dividend Yield, March 2nd 2020
NSEI:MGL Historical Dividend Yield, March 2nd 2020

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. 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 Mahanagar Gas’s earnings per share have risen 18% per annum over the last five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination – plus the dividend can always be increased later.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Mahanagar Gas has delivered an average of 4.6% per year annual increase in its dividend, based on the past three years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Mahanagar Gas is keeping back more of its profits to grow the business.

To Sum It Up

Should investors buy Mahanagar Gas for the upcoming dividend? It’s great that Mahanagar Gas is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It’s disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There’s a lot to like about Mahanagar Gas, and we would prioritise taking a closer look at it.

Want to learn more about Mahanagar Gas? Here’s a visualisation of its historical rate of revenue and earnings growth.

If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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