Should You Buy Kaveri Seed Company Limited (NSE:KSCL) For Its Upcoming Dividend?

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Kaveri Seed Company Limited (NSE:KSCL) is about to trade ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 18th of November will not receive this dividend, which will be paid on the 10th of December.

Kaveri Seed's next dividend payment will be ₹4.00 per share, which looks like a nice increase on last year, when the company distributed a total of ₹3.00 to shareholders. If you buy this business for its dividend, you should have an idea of whether Kaveri Seed's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Kaveri Seed

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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. It paid out 7.2% of its free cash flow as dividends last year, which is conservatively low.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Kaveri Seed earnings per share are up 5.0% per annum over the last five years. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Kaveri Seed has lifted its dividend by approximately 22% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Should investors buy Kaveri Seed for the upcoming dividend? Earnings per share growth has been growing somewhat, and Kaveri Seed is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Kaveri Seed is halfway there. Kaveri Seed looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while Kaveri Seed has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 2 warning signs for Kaveri Seed and you should be aware of these before buying any shares.

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.

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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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