Dividend Investors: Don't Be Too Quick To Buy Divgi TorqTransfer Systems Limited (NSE:DIVGIITTS) For Its Upcoming Dividend

Divgi TorqTransfer Systems Limited (NSE:DIVGIITTS) is about to trade ex-dividend in the next three days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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 Divgi TorqTransfer Systems' shares on or after the 8th of September, you won't be eligible to receive the dividend, when it is paid on the 16th of October.

The company's next dividend payment will be ₹2.60 per share, and in the last 12 months, the company paid a total of ₹2.60 per share. Based on the last year's worth of payments, Divgi TorqTransfer Systems stock has a trailing yield of around 0.4% on the current share price of ₹662.40. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

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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. That's why it's good to see Divgi TorqTransfer Systems paying out a modest 33% of its earnings. 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 91% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

While Divgi TorqTransfer Systems's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Divgi TorqTransfer Systems to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

View our latest analysis for Divgi TorqTransfer Systems

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Divgi TorqTransfer Systems's 5.1% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Divgi TorqTransfer Systems has seen its dividend decline 12% per annum on average over the past two years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Is Divgi TorqTransfer Systems worth buying for its dividend? Divgi TorqTransfer Systems's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not that we think Divgi TorqTransfer Systems is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Divgi TorqTransfer Systems and want to know more, you'll find it very useful to know what risks this stock faces. For example - Divgi TorqTransfer Systems has 1 warning sign we think you should be aware of.

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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.