There's A Lot To Like About Samvardhana Motherson International's (NSE:MOTHERSON) Upcoming ₹0.35 Dividend

Samvardhana Motherson International Limited (NSE:MOTHERSON) stock is about to trade ex-dividend in three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Samvardhana Motherson International's shares on or after the 23rd of June will not receive the dividend, which will be paid on the 26th of September.

The company's next dividend payment will be ₹0.35 per share, on the back of last year when the company paid a total of ₹1.00 to shareholders. Last year's total dividend payments show that Samvardhana Motherson International has a trailing yield of 0.6% on the current share price of ₹149.81. If you buy this business for its dividend, you should have an idea of whether Samvardhana Motherson International's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Samvardhana Motherson International has a low and conservative payout ratio of just 15% of its income after tax. A useful secondary check can be to evaluate whether Samvardhana Motherson International generated enough free cash flow to afford its dividend. It distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Samvardhana Motherson International'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.

View our latest analysis for Samvardhana Motherson International

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 fall far enough, the company could be forced to cut its dividend. It's encouraging to see Samvardhana Motherson International has grown its earnings rapidly, up 26% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

Samvardhana Motherson International also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

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, Samvardhana Motherson International has lifted its dividend by approximately 5.6% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Final Takeaway

From a dividend perspective, should investors buy or avoid Samvardhana Motherson International? It's great that Samvardhana Motherson International 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. Samvardhana Motherson International looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

On that note, you'll want to research what risks Samvardhana Motherson International is facing. For example - Samvardhana Motherson International 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.