It Might Not Be A Great Idea To Buy Bharat Forge Limited (NSE:BHARATFORG) For Its Next Dividend

Bharat Forge Limited (NSE:BHARATFORG) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Bharat Forge's shares on or after the 5th of July, you won't be eligible to receive the dividend, when it is paid on the 8th of September.

The company's upcoming dividend is ₹6.50 a share, following on from the last 12 months, when the company distributed a total of ₹9.00 per share to shareholders. Based on the last year's worth of payments, Bharat Forge has a trailing yield of 0.5% on the current stock price of ₹1670.35. If you buy this business for its dividend, you should have an idea of whether Bharat Forge's dividend is reliable and sustainable. As a result, readers should always check whether Bharat Forge has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Bharat Forge

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Bharat Forge paid out a comfortable 44% of its profit last year. A useful secondary check can be to evaluate whether Bharat Forge generated enough free cash flow to afford its dividend. It paid out an unsustainably high 271% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Bharat Forge is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Bharat Forge paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Bharat Forge's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's not encouraging to see that Bharat Forge's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Bharat Forge has lifted its dividend by approximately 15% a year on average.

The Bottom Line

Is Bharat Forge an attractive dividend stock, or better left on the shelf? It's disappointing to see earnings per share have fallen slightly, even though Bharat Forge is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Bottom line: Bharat Forge has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Bharat Forge as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 2 warning signs for Bharat Forge that we recommend you consider before investing in the business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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