Hindustan Composites (NSE:HINDCOMPOS) Could Be A Buy 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 Hindustan Composites Limited (NSE:HINDCOMPOS) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Hindustan Composites' shares before the 20th of September in order to receive the dividend, which the company will pay on the 22nd of October.

The company's next dividend payment will be ₹2.00 per share, on the back of last year when the company paid a total of ₹2.00 to shareholders. Last year's total dividend payments show that Hindustan Composites has a trailing yield of 0.3% on the current share price of ₹592.60. 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.

Check out our latest analysis for Hindustan Composites

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hindustan Composites is paying out just 8.6% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Hindustan Composites generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (77%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Hindustan Composites'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 Hindustan Composites paid out over the last 12 months.

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 fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Hindustan Composites's earnings per share have been growing at 13% a year for the past five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. We're surprised that management has not elected to reinvest more in the business to accelerate growth further.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Hindustan Composites has lifted its dividend by approximately 20% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Is Hindustan Composites worth buying for its dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Hindustan Composites paid out less than half its earnings and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

In light of that, while Hindustan Composites has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 1 warning sign for Hindustan Composites that you should be aware of before investing in their shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.